India has introduced a ‘good economic reform’, the Goods and Services Tax, in a complicated manner which will lead to distortions and cheating, globally acclaimed economist Guy Sorman said today. He said most countries which apply this kind of taxation have at the most three rates – basic products, luxury at the other end and everything else in between. However, the diversity of GST rates in India will bring “distortions and cheating”, said the French economist.
“A low GST rate will orient the producers towards certain products and services which may not bring productivity and growth progress. The temptation will be strong to qualify a product with a wrong name, with the complicity of the tax and custom agents, in order to benefit from the lower rate,” Sorman told PTI. “…why such a good reform is implemented in India in such a complicated manner, escapes my understanding,” he said.
The four-slab GST was rolled out from July 1. The new regime taxes various goods and services at 5, 12, 18 and 28 per cent, while keeping essential commodities out. Besides, the GST rate on gold and polished diamond is 3 per cent, while it is 0.25 per cent on rough diamond. That apart, liquor has been exempted from GST. While products like kerosene, naphtha and LPG will be under the ambit of GST, five items — crude oil, natural gas, aviation fuel, diesel and petrol — have been excluded from the basket for the initial years.
Noting that unifying the market is a very positive proposal which could increase growth by 1 or 2 per cent a year, Sorman said however that “such a reform will need several years to be understood and applied”. Pravin Krishna, Chung Ju Yung Distinguished Professor of International Economics and Business at Johns Hopkins University, said that GST will be very important for India’s overall economic development.
Border check posts have been a major inefficiency in freight movement, accounting for 10-20 per cent of transit time on average, Krishna said, adding that “this will be significantly reduced”. As many as 22 states, including Delhi, West Bengal and Maharashtra, have already abolished check posts within three days of the implementation of GST.
Krishna further noted that the GST tax structure suggests a reduction on effective tax on manufactured goods on average, which should boost manufacturing. “In the medium-run, production facilities and warehouses will locate more efficiently. Supporting infrastructural investments and more efficient logistics will allow even greater gains to be earned from GST,” he pointed out.
Echoing similar view, eminent economist and former Principal Economic Advisor in Finance Ministry Ila Patnaik also said a nationwide GST with the same rates across all states and the same law is a major step for the country.
Patnaik said she hoped that in the long run the GST council will work on constantly improving and simplifying the tax system, “and the GST will converge to a single rate and a single tax administration for the economy to reap maximum benefits of a nationwide tax”.