Considering India has been trying to implement a Goods and Service Tax (GST) for well over a decade, the fact that, on the eve of its third birthday, the NDA has been able to get all state governments to agree to a tax-rate structure for both goods and services and to finalise most rules is a big step forward. Given India’s federal structure, doing so has meant large compromises, so this is far from the perfect single- and low-tax GST that reformers wanted. Not only have anti-market laws like the one on anti-profiteering – this can unleash an inspector raj across states – been brought in, there is no clarity on whether inter-state documentation has been completely done away with either.
Worse, antiquated socialist-era principles have found their way into GST. So, there is to be one rate of GST if a hotel room costs less than Rs 1,000 per night and another if the room costs up to Rs 2,500 and so on – a total of four GST rates will apply to hotels and, by extension, to the restaurants in them. Naturally then, the greater compliance that all associated with a GST will be that much more difficult to achieve as the multiplicity of rates will encourage gaming the system.
To the extent, the Centre was not able to convince the state governments to allow a single registration for pan-Indian service providers, and to the extent, the assessee base is to be shared across central and state taxmen, the first few quarters of GST are likely to be fraught with difficulty. And since a large part of the fillip a GST gives to consumption comes from the low tax rate, this GST will not do that right now – indeed, the governing principle behind fixing the tax rates was to ensure they were not too different from what is being charged right now under excise/service and VAT; that is also the reason why, though India is moving to a new tax regime, it has imported many of the flaws associated with the older one.
The GST regime will spur consumption only when, in the future, tax rates are brought down and while this can happen once tax collections rise, it is difficult to get governments to agree to lower rates – more likely, when tax collections rise, the centre/states will be more than happy to find new ways to spend the money. That said, it is not true there are no benefits. For one, with inter-state tax arbitrage a thing of the past, firms will no longer plan their warehouses on this basis; it will be logistics that will drive warehouse locations.
To the extent that input credits will depend on not allowing the value chain to be broken, GST will encourage greater formalization of the economy; the creation of a value-addition chain will also act as a check on black money creation. The longer-term benefits, however, will have to be fought for. So, someone will have to assiduously champion rate cuts at the GST Council; ditto for ensuring the anti-profiteering law doesn’t become a source of harassment for manufacturers/service providers. In other words, now that the contours of the new law – to be introduced from July 1 – have been agreed upon, the next job is to ensure it becomes revolutionary instead of, as now, evolutionary.