GST Implementation –“ My Useful Idea “

After the results of recent Assembly in 4 major states, NDA is upbeat on the passage of the GST bill in the Upper House. GST implementation, whenever it is done, will be perceived as the single-most important tax reform after independence. GST, for beginners, is the “Goods and Services Tax” where it is the common tax regime for the entire country. Today, each state has their own Sales Tax laws & rates for each product- for example, the sales tax on ‘Diwali crackers’ is lower in Tamil Nadu as compared to Karnataka. Hence, people in Bangalore visit Hosur (TN district bordering Karnataka) which is just 40 Kms, to buy fire-crackers during Diwali. This leads to loss of business to Bangalore Fire-Cracker dealers resulting in loss in Sales Tax to Karnataka as compared to Tamil Nadu. Similarly, this happens to many products like mobile phones, bread, etc. This also leads to businesses buying material from states which has lower tax and move them ‘illegally’ to states where the tax is high and sell them there for additional margins. If the buyer has to legally move them, then he has to give ‘certain undertakings’ to the state government and pay ‘Central Sales Tax’ which is an additional cost.

After GST implementation, this anomaly will be corrected(though partially) with every state having the same rate of Sales Tax under GST. So, this will stop the ‘illegal’ movement of goods across states and less ‘inspector raj’ at border check-posts. Also, many economist predict that post-GST implementation, the GDP will automatically go up by about 1% from its current level. It will definitely ease the inter-state movement of goods and also help the ‘ease of doing business’ rating. This is the good thing for our economy.

Having said that, I have my own doubts on this effect. First of all, it will increase the cost of goods and services in the short term for the consumers, as the rate of Sales Tax will be significantly higher at, say 18% as compared to present levels of 5–14% across various states. Even after certain tax-credit adjustments by the manufacturers & sellers, the net impact will be atleast 3–4% higher costs to the consumer. So, consumers will cry wolf as they see no benefit in this atleast in the first 2 years of implementation. Hence, Retailers, in turn to retain customers, will continue to resort to selling goods ‘without bill’ which means the retailers have to buy without bill or underinvoiced bill. This impact will go through the supply-chain, retailer to dealer to distributor to finally the manufacturer. Everyone will resort to ‘undervaluing’ their goods on paper — for the fear of losing their customers. The direct impact of this will be ‘lower GST collection’ and inturn, means ‘higher budgetery constraints’. So, the govt. will resort to more ‘inspector raj’ — which means more ‘bribes’ and ‘more black money’

I feel that any successful implementation should be beneficial to the consumers — afterall, they drive the economy. So, the govt should look at where GST benefit the consumers. Today, as it stands, it does not bring any noticeable or tangible benefits to the final consumers.

I feel Govt. should really look at ‘taxs’ as a whole, rather than bifurcating it as ‘indirect taxes and ‘direct taxes’. Again, for beginners, ‘Direct Tax’ is one which you pay directly to govt — like Income Tax, Corporate Tax, Wealth Tax, etc. ‘Indirect Taxes’ are those taxes which are paid ‘indirectly’ to the govt by the consumer — sales tax, customs duty, excise duty, service tax etc which are paid through the’intermediaries’ like retailers, hotels, etc as a part of product or service costs.

Now, consumers are paying ‘indirect taxes’ but they do not benefit anything from it. So, they ‘resort’ to buying goods and services ‘without bill’ — which leads to the entire supply chain — resorting to ‘without bill’ system, as explained earlier. But, if consumers are given a ‘credit’ for every indirect tax they pay which can be then adjusted to the ‘direct tax’(income tax, property tax) they pay, then most consumers will tend to insist on ‘bill’ for everything — whether they purchase grocery, vegetable or gold. With the govt. eagerness to use ‘Adhaar’ and using digital technology for tax compliance, this can be easily implemented. For example, if a consumer has paid Rs 50000 as ‘indirect tax’ in a financial year, he can get say 50% credit for this — say Rs 25000 which can be offset against the ‘income tax payable’ for a particular year. Any excess credit on his account, can be carried forward to the next year or years later (in perpertuity). This is one like the reward points on a credit card, but more usable. This will help reduce black money with the traders and manufacturers. Even if the govt could not bring black money from abroad, atleast, it can reduce what is being generated in India. This is one such way.

There would be skeptics to this idea who would indicate that there are only 6 Cr people (2015–16 data) who pay income tax, that too mainly middle-class salaried class whereas almost the entire population pays sales tax in some form or other. So, this system is a non-starter as very few people will be benefited by this system. My argument to that is — anyway, only 5% (6 Cr) have long been carrying the burden of govt taxes and atleast govt can reward & incentivize atleast this 6 Cr people — these people would insist on buying goods and services on bill — making GST little more effective. In my view, any loss in Income Tax revenue can be easily off-set by bigger gains from GST collection. The empirical evidence for this can be extrapolated from the fact that 2 Cr out this 6 Cr people(1/3 rd) paying Income tax are in the lowest 10% tax bracket (upto Rs 5 lac annual income). If these people insist on bills while purchasing, they get 18% GST income for the govt — while forgoing only 10% direct tax, if at all, they get 100% ‘credit’ through this scheme.

Also, if the govt intends to broad-base income tax — by removing exemptions and reducing rates and slabs, this scheme will be more effective and participatory. Many experts have talked about a 10% flat income tax rate for all income levels without any exemptions will generate more tax income and more tax compliance in the country. Modi govt’s JAM platform(Jan-Dhan, Aadhar and Mobile phone) which they tom-tom about, for implementing their various welfare schemes, can also be effectively utilized to implement this idea. I really do not know, this might even force more people to disclose their correct income and will be willing to pay more income tax. I guess, the time has come when we have only one Authority — Central Board of Taxes — instead of CBDT and CBIT

Finally, Jaitleyji, I have given my idea — It is your turn to think beyond the box and implement this or a variation of this. You can even call this your brainchild. I do not care. You can even use this scheme to score some political brownie points against your own party colleague, Dr Swamy- who is accusing you of being ineffective in curbing black money generation and repatriation. So, it is your turn Mr FM…

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