India’s tax policy should reflect the philosophy of its founding fathers as enshrined in the Constitution and that philosophy is of a socialist welfare state. Whether the Goods and Services Tax Bill is a step in that direction, needs to be debated, writes SK Mahata
The Goods and Service Tax Bill is said to be the most important reform in the sphere of indirect taxes in post-independence India. Indirect taxes affect almost all sections of society. Almost 70 per cent of all taxes collected in India (Centre and State put together) are indirect taxes. The relevance of indirect tax in the common man’s life can be gauged from the fact that it played an important role in our independence movement. The Mahatma’s Dandi March was to protest the imposition of indirect tax on salt. Hence, it is necessary to examine the GST Bill in the light of its impact on the common man.
What is an indirect taxIJ Why it is called ‘indirect’IJ These questions need to be understood before discussing the proposed reform through the GST Bill. Indirect tax is called as such because the tax is being paid by the ultimate consumer but comes to the Government’s account either through the manufacturer, the retailer, the wholesaler or the service provider.
In other words, when we buy a packet of biscuits or a match box, the price of the good includes the tax element. Usually, the price tag states that it is “Inclusive of all taxes”. Similarly, when we recharge our mobile phone or pay our restaurant bills or buy a metro pass even, the final amount includes the tax element. Thus, indirect taxes are intertwined with every financial activity and of a common man’s life. All of us pay indirect taxes in one form or the other for the various goods and services we avail irrespective of our income level and that too at the same rate.
What the proposed reform seeks to do is this: Instead of having two separate laws for goods and services, it proposes a single Act at the Central level. The term ‘manufacturing point’ will be replaced by ‘supply’. Thus, anybody supplying goods or services will come under the tax net. However, the methodology of calculating tax remains the same i.e. on value-addition or VAT.
What matters to the common man is the amount of tax he is going to pay. The rate of GST varies from country to country. It is five per cent in Taiwan, six per cent in Malaysia, seven per cent in Thailand and Singapore, 10 per cent in Australia and Indonesia, 15 per cent in New Zealand, 19 per cent in Germany, 19.6 per cent in France and 27 per cent in Hungary. Though the rate of GST is not fixed in India, it has been proposed at anything between 18 per cent (as per the Congress) to 27 per cent (according to the Revenue Neutral Rate).
let us assume that combined GST is 20 per cent. Immediately then, the cost of services will jump by 20 per cent across the board. Only 10 months back in March 2015 the rate was 12.36 per cent. Thus a individual spending one lakh rupees to purchase goods or consume services will bear a tax burden of Rs20,000. A person whose annual income is, say, Rs5,00,000 will be paying income tax of Rs30,000 but also be paying as much as Rs1,00,000 as indirect tax. The present GST bill does not speak anything on this issue.
Thus, the question is: For the ultimate tax payer, is this so-called ‘reform’ only a change in nomenclature, wherein Central Excise Tax, Sales Tax, Service Tax etc will be known as GSTIJ As the service sector accounts for almost 60 per cent of India’s gross domestic product and affects all aspects of life and all strata of people, the proposed GST Bill will have direct bearing on the poor man’s earnings and savings.
The major advantages of the GST, according to the supporters of the present Bill, are: First, simplification and unification of the existing system as the plethora of existing taxes will replaced by one tax, which will help reduce documentation and increase the ease of doing business; second, GST will have a positive impact on growth and investment; and third, prices will come down.
These assertions need to be examined. First, it is a myth that the entire economy is suffering due to multiple tax legislations. The service sector already has a unified indirect tax system in the Finance Act, 1994. Telecommunication service providers, such as Airtel and Vodafone, for example, can provide service in many parts of the country and still file their tax return or deposit their dues from one location. They are answerable to only one authority. Similarly, a newspaper with multiple editions also enjoys the same benefit. However, with GST, the situation may change, as State Governments will have jurisdiction. Thus the entire service sector will come under dual control. States may ask for sperate tax returns, relating to activities carried out in their domains.
Similarly, the entire retail sector which presently comes under the Central Sales Tax Act, 1956, will come under the dual authority of the Centre and State Governments. As discussed earlier, the GST Bill proposes to bring the ‘supplier’ of goods and services under the tax net. Hence, dealers and wholesalers who were earlier not under the ambit of Central Excise Act, 1944, will also come under the tax authority of the Union Government while the supplier of services, who were earlier only under the Central tax authority, will now come under the State Government’s tax authority as well. This could bring in Inspector Raj from the back door.
As far as tax simplification is concerned, it is a well known fact that it’s not the single Act but the rules framed therein, and the interpretation and implementation of those rules, which determine simplicity. The rise and fall of the GDP and prices are governed by multiple factors such as material cost, labour cost, demand and supply and investment. World Bank data shows that while the Philippines had a positive trend in GDP growth, Australia has shown a negative trend since the introduction of the GST. It will be naïve to say that the taxation system alone is responsible for this.
No doubt, the present tax system needs to be abolished and a simplified tax regime introduced, not only for investments from abroad but also for the domestic industry as well as the common man. A simplified tax system is fundamental to any society’s growth, but there is nothing in the Constitution that stops the Government from achieving this goal without the GST. Big economies of the world such as the US, China and Japan do not have a GST regime.
When Albert Einstein was asked about tax returns, he replied that he was a simple mathematician and only a ‘philosopher’ could explain the system. Indeed, tax policy has to be philosophical. The Indian tax policy should reflect the philosophy of our founding fathers as enshrined in the Constitution and that philosophy is of a socialist welfare state. Whether the GST Bill is a step in that direction, needs to be debated.
(The writer is an expert on finance)