Satya Poddar, partner, EY, has been one of the staunchest and most incisive critics of any attempt to distort the Goods and Services Tax (GST) structure by deviating from the best global practices. In an interview with FE, he explains how the GST, as being planned now, is far from perfect and might not achieve its desired objectives.
How would GST contribute in terms of adding value to the economy?
A well-designed GST would add value to the economy by replacing the current archaic and highly flawed assorted indirect taxes with a better and simpler tax which will apply on a much broader base at moderate rate. Thanks to superior tax design, the entire supply chain (transactions of businesses above a low threshold) including manufacturing, wholesale and retail and both goods and services will be captured. The GST could therefore lead to a substantial reduction in the tax on capital investments and production inputs. It would remove barriers to the movement of goods and services within the country and institute a common, pan-India market.
Given the structure envisaged and exclusions/exemptions allowed, would GST reduce cascading of taxes and broaden the tax base to the required extent?
This remains to be seen. With the exclusion of real estate (construction for factory and civil work), alcohol and electricity and possibly petroleum and natural gas at least in the initial years, the cascading (of taxes) will remain more or less the same as now in aggregate terms. Given the political friction over the tax base and rates, the imperatives of broader base and moderate rate appear difficult to be met. The states, particularly, are harping on keeping a narrow base (with too many exemptions) and tax rate of 20% is being talked about. If the GST is structured in this manner, I won’t expect it to bring about any improvement in the country’s economic performance, neither would it make doing business easier.
The GST, as I conceive it and exampled in many countries, is a ‘good and simple tax’ and only if it is really so, its objectives can be achieved; or else, it would merely be a name changer, rather than the desired game changer.
What should be the ideal (standard) rate for GST? It is argued that a low rate would boost compliance and revenue, but states seem wary.
The secret, if one would say so, to getting more revenue is indeed not to jack up the tax rate and load the taxes onto a narrow base. A moderate rate, for sure, can lead to significant improvement in tax compliance and boost the economy and both of these would bolster the government’s revenue. The best example to illustrate the point is that of New Zealand, which witnessed a huge 42% jump in tax revenue after the rollout of GST (over what was projected based on revenue-neutral rate calculation), thanks to a comprehensive base and a moderate rate (10%). The handsome fiscal dividend earned by the country should be an eye-opener for India.
Other countries that have in recent years adopted GST/VAT system have also kept the rates low – Japan and Singapore at 3%, Austria at 10%, South Africa at 15% and Malaysia at 6%. All these countries are collecting more tax revenues (with substantial addition to trend growth) with GST/VAT. India’s indirect tax-GDP ratio is a dismal 6%. Ideally this growth would have been possible with a tax rate of 12% (whereas the actual incidence of taxes, with central excise/service tax and state VAT) is much higher. If you levy taxes at 18%, 20% or 22% and your tax-GDP ratio is still 6%, obviously something is amiss. In all countries where GST is in place with moderate rates, the indirect tax-GDP ratio is much higher than India’s.
No better proof is required than the fact that Canada, which began with a GST rate of 7%, subsequently reduced the rate to 5% to show that GST yields higher revenue to governments.
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As far as sectoral impact is concerned, between manufacturing and services, how would GST influence business margins and growth?
A close to 20% tax (what is being talked about as the combined GST rate with central and state components) would be devastating for the services sector (the rate of service tax, along with Krishi Kalyan cess, is now 15%). Contrary to what is being touted, the gains of manufacturing industries will also be miniscule. This is because excise duty/sales tax exemptions are provided now for some large industries and these will now be subjected to GST. Significantly, about a quarter of the consumer basket in India consists of textile & apparel and processed food, large segments of both of which enjoy tax sops now. Even a modest 12% GST rate (which appears quite unlikely) would substantially increase the tax burden on these industries and thereby the consumers.
In the services sector, the chief contributors to the government’s tax revenue are telecom and financial services. These industries might not see any beneficial impact if the GST rate is 18-20% or higher.
