GSTs seven deadly defects The Indian Express

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GSTs seven deadly defects

Written by ARVIND P. DATAR , K Vaitheeswaran | Updated: September 19, 2015 12:13 am

Industry and large sections of the media have been seduced into believing that the GST will alter the
economic landscape of India and usher in a benign, assessee-friendly tax regime. (Source: Reuters file
photo)

Lalit Modi effectively but unintentionally torpedoed the GST bill. In a shocking display of warped priorities, a debate on the biggest
change in indirect taxes was sacrificed at the altar of petty politics. Now, with the Congress still unrelenting, the government has
dropped the plan to convene a special session of Parliament for passing the GST bill. If there is another scam before the next
session, we can say goodbye to any meaningful legislative business being conducted. But this interlude should give the nation time
to rethink whether the headlong pursuit of a complex and mangled GST is really in Indias interest. Can we afford such a
cataclysmic change at a time when there is a critical decline in the manufacturing and services sectors?
Industry and large sections of the media have been seduced into believing that the GST will alter the economic landscape of India
and usher in a benign, assessee-friendly tax regime. Indeed, in its traditional or classical form, a GST would have been enormously
beneficial. But the Indian avatar, unfortunately, suffers from at least seven deadly defects.
First, one of the main benefits that the new GST regime promises is a reduction of multiple taxes. But the truth is just the opposite.
Article 246A now confers power on Parliament and every state legislature to levy goods and service tax. Thus, we are likely to have
one parliamentary law and about 28 state laws that levy GST. And there is no constitutional requirement that all the state laws be
uniform. The GST Council can only recommend a model law but nothing prevents each state from going its own way. The VAT
experience is testimony to this. Such multiple levies by Parliament and the states, if not in harmony, will have disastrous
consequences.
Second, after nine years, the constitutional amendment to facilitate the GST is still pending. And this is just the beginning: the
herculean task of drafting the Central GST, the state GSTs and the inter-state GST is yet to be completed. What will be the text of
these laws and the procedural rules and forms? How are we going to merge the existing laws on excise duty, VAT and service tax
together? And, most important, how are we going to grant seamless input credit? It is indeed unfortunate that the actual enactments
and rules on the GST are still unknown; this is a dangerous area of darkness. Drafting these laws without consulting stakeholders
will only compound the confusion.
Third, there is still uncertainty about the final GST rate or rates. While the states want a rate of 26 per cent, the Centre is seeking a
cap of 16-18 per cent. A GST levy of even 16 per cent is bound to result in largescale tax evasion at the retail level. It is going to be
very difficult to expect a consumer to pay 26 or even 16 per cent on the purchase of a refrigerator costing Rs 50,000. There is also
no clarity on the basic threshold exemption and the GST can easily be derailed by multiple rates and numerous exemptions/
concessions.

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GSTs seven deadly defects The Indian Express

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Fourth, the basic feature of any GST is a seamless system of taxation where all duties on all inputs (whether goods or services) are
set off against the duties payable on the final product. While most countries have a single GST, few have a dual GST. The Indian
version is likely to be the most complex, with different states enacting their own laws, thus
introducing the concept of importing and exporting states. The exclusion of petroleum products, electricity and real estate will
result in a grotesque, mangled and mutilated Indian version of the GST. While there could be possible cost-savings for
manufacturers due to a leaner supply chain and the elimination of cascading taxes, the impact on the service sector could be costly
and inflationary.
Fifth, although several countries have a GST, it is completely unsuited to a vast, heterogeneous country like India. An essential
feature of Indian federalism is that the Union and the states can levy different types of indirect taxes to suit their special
requirements. Indeed, the needs of states like Maharashtra and Gujarat are completely different from states like Jharkhand and
Assam. The GST is bound to lead to serious difficulties, and could possibly fail, because it seeks to treat unequal states equally. It
will be practically impossible for the Centre to compensate states that are likely to lose tax revenue for the next several years.
Sixth, the GST is a merger of Central and state levies right now administered by Central and state government officials. How many
assessees will we have state-wise? Who will administer a combined GST? Will each state insist on administering the GST within its
territory? If so, there will be no role for the Central excise or service tax departments, except in inter-state transactions. Which are
the appellate authorities? Will there be one tribunal or multiple tribunals?
Seventh, the proposed GST will make imports more competitive. The complex regulatory and tax laws and rampant corruption at
each stage make manufacturing in India an activity only for the brave. If IGST on imports is available as a credit to a trader as
against the existing system, which does not allow countervailing duty and special additional duty credits, imported goods will get a
competitive advantage, seriously sabotaging the Make in India initiative.
The courageous course of action would be to abandon the proposed GST and work towards a unified Central levy. It is best that the
taxing powers of the state are not curbed. Victor Hugo reminded us that you cannot stop an idea whose time has come. The
tortuous history of the GST in India is a sign that the Indian model of this tax is an idea whose time should never come. We can
ignore the clear writing on the wall at our own peril.
The writers are practising advocates of the Madras High Court and Supreme Court

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