There is no halfway in GST

Written by KG Narendranath | Updated: Dec 10 2013, 08:52am hrs
David Raistrick, global managing director, Indirect Taxes, Deloitte, believes that there is no halfway in the pursuit of introducing a goods and services tax (GST) and that economic-wide benefits of a unified indirect tax regime will not materialise if it has too many rates and exemptions. He spoke to KG Narendranath and Gireesh Chandra Prasad on the global GST experience and what India can take cue from. Excerpts:

There is opposition from some of the Indian states, particularly those with a strong manufacturing base, on GST being a destination-based tax. Is that the case elsewhere in the world too

I believe the destination-based system is a better way of running GST. I can understand why some of the states may be concerned. Naturally, the central government will have to ensure that all the states have the financial certainty that they currently enjoy.

What is the best way to tax inter-state transactions under GST

You dont have to necessarily tax inter-state transactions under GST, although you can do it. You could look at the EU model. It is said the EU model is inter-state, the countries being states within the EU. If you really want to simplify GST, inter-state tax can be zero. When you really have a levy, you are back in the origin-based system, which is characteristically at variance with the current and emergent principles of world trade.

Arent there any inter-state taxes in the EU

Not exactly. Different member states can charge but they tend to base it on the final supply. It is just the easy way to do it. India may like to have a GST system that will work alongside the rest of the world because Indian businesses are going to trade more and more with the rest of the world.

The US is one country that does not have a GST system

There are some real parallels between India and the US. The US has not had a GST system because states themselves are very powerful. That is the way the US Constitution is designed. They cannot easily move into GST. They have the power to set tax rates. And they have very different rates. There is no input tax credit system in the US either. It is purely the rate that is charged at every stage of supply.

Does that make the US economy any less competitive

It is the worlds largest economy today. It is really hard to say what would it do to the economy if the US got rid of the sales tax and brought in GST. The rest of the world is gradually adopting GST. Now, we have Malaysia introducing GST in 2015. China, of course, is trying to reform its VAT system, which is progressing rapidly. We saw Australia adopting GST ten years ago. The Middle-East is looking at having a GST system very similar to that of the EU. We will soon end up with less than ten countries in the world without a GST system, one of the largest among them being the US.

If India is moving towards GST, it is a good development for the Indian economy as well as Indian businesses. It should come in a soon as possible. A country considering to introduce GST should simplify its tax system and let businesses go out and focus on business without worrying about the huge amounts of paper work that slows the economy down. Businesses can do two things, but only one at a given time. They can either try and understand very complicated rules and do paper work or follow simple rules and focus on making money for the business which helps the overall economy.

In practical terms, how feasible is it to remove the cascading effect of taxes

I think in the GST system, it is feasible. I know there are many layers of cascading of taxes now. If you get GST right, you can avoid cascading and everybody (businesses, government and consumers) wins.

Does the international experience suggest that implementation of GST has helped in expanding the tax base

The GST tax base need not expand. If you look at the global tax revenue trend, you would notice that indirect tax revenue as a share of governments overall tax revenue has been increasing, while the share of corporate income tax revenue has been declining for 30 years. Now, around the world, corporate taxes account for about 33% of a countrys revenue, while indirect taxes are at about 31%. The rest is made up by other things like taxes on personal income, wealth tax and other levies. (In India personal taxes are treated as direct taxes and the relative share of various taxes may not be very different.) Indirect tax revenue globally has been going up every year. Ten years ago, the share of indirect taxes might have been in the mid-20s of a governments overall tax revenue.

How crucial is it to keep exemptions from GST to a minimum

It is important to subsume petroleum, tobacco and other products into GST when it is introduced. I would not like to have different taxes on petroleum products in different states. It should all be the same. One rate everywhere makes it simple. If you really have to have a band, allow a narrow band.

What about stamp duty

Stamp duty is hard (to be included in GST). Stamp duties are levied on immovable property transactions and on documents which are to be admitted in a court of law, identical to the English system. If you look around the world, stamp duties have not been brought into GST. Bringing stamp duty into GST will make it more complex.

While trying to sell the idea of GST to state governments, the Indian government has been citing the Canada example of the economy expanding by an incremental 1.4 percentage points after its introduction. Do you think the same could be the case here

Yes I do. I am convinced that bringing GST will help the economy expand by 1 or 2 percentage points more provided you get it right. The worst thing to happen is to bring in GST badly with lots of different rates and lots of complexity. If you are going to do that, you are not changing anything but the name. If you really want to benefit from GST, bring all products into it. There is no half way in GST.

Do you think GST should be implemented in phases

One of the options is to implement GST slowly. On day one a nation could implement a few things, subsequently a few other things. It is not desirable. It may work well, but would take longer to get the benefits of GST and cause (avoidable) confusion every time there is a change. So the better option is to make it easier, get it right on day one. I understand why the states and the central government have a different view. This is natural because they look at things from different perspectives. They all need to work together to get GST right so that the benefits are available to all.

Should the introduction of GST be revenue-neutral

Whatever indirect tax revenue a country gets before GST implementation should be the revenue afterwards as well. Nations should not use GST as an exercise to raise tax. If in future years there is need for more income, the rates could be raised then. It is better to have minimal rates, as close as they can get to one another. Europe has many rates but they are individual nations within the Union. Even then, one sees rates coming closer and closer to one another each year and rules being harmonised.

What is the GST range that most countries levy

The average standard (or top) rate in the world is 21.5%. The weighted average GST or VAT charged is 16.5% because there are some rates that brings down the average (this doesnt look away from feasible rate for India). One of the beauties of GST is that businesses get credit for the taxes on items purchased for ones business. It is very hard to escape taxes under the GST system. Escaping tax means not getting tax credits on purchases made and it amounts to paying half the GST rate. Registering for GST helps in getting input tax credit, which works as an incentive for paying taxes under GST.