Just like any tax structure in the world, Indian tax structure can also be divided into two parts:
1) Direct Tax
2) Indirect Tax
Direct tax is directly paid to government/Tax authorities and it cannot be shifted to another person. An example of Direct tax is an Income tax for individuals and corporate tax for Corporates/Companies.
Indirect tax as the name suggests can be shifted to another person by the producer/distributor/retailer (usually to the final consumer). For example, the tax levied on manufacture or sale of goods and services can be shifted to final consumers through higher price. Some of the examples of indirect taxes are sales tax, service tax, entertainment tax, customs duties, estate tax, octroi, excise duties etc. But the ability to shift taxes also depends on the demand and supply condition of the market.
GST(Goods and services tax) only deals with the indirect tax system. So no changes in direct taxes (income tax, wealth tax, property tax, corporate tax). GST is not so new method (Value added system) and a new system of indirect taxation. So instead of multiple indirect taxes, there is now supposedly a single GST. The method of GST tax calculation is based on value-added methods.
What is Value Added Method?
Say, if I buy 4 kg of (Rs.100) of raw wheat flour(ATTA) and make 20 rotis and sell it at a final price of Rs. 200. Then the value which I added during this process will be Rs.100 [final selling price (Rs.200) – Input (ATTA) price(Rs.100)]. So instead of tax on Rs. 200 under VAT system tax will only be imposed on value added which is Rs. 100. If you have sales tax of 10% then you have to pay Rs.20 as tax but under VAT system with the same tax rate of 10% , consumer pays Rs.10. But remember VAT is not unique to GST as it was already introduced in Indian tax system way back on 1st April, 2005.
Each State had its own VAT and the central government had its own VAT known as CENVAT. But there was no uniformity in rates across states and along with VAT multiple indirect taxes also existed. The only difference of the old Tax regime with GST now is that all these other indirect taxes have also been subsumed under the GST.
It was claimed that GST will bring one nation one tax. But the reality is far from such simple slogan and propaganda. Under GST you have three taxes with five tax rates. There will be three taxes : one collected by state (State GST) , Center (Center GST) and Integrated GST (collected by centre). Also, there is No single tax rate instead we have five tax slabs for different categories of goods and services: 0%, 3%, 5%, 12%, 18%, 28%.
Not only that it is also claimed that GST is ‘Pro-poor’ and Sanskari in nature. But this Pro-poor GST has taxed essential items of masses like Gold and Diamond at 3% rate whereas luxurious items like Glucose biscuit are taxed under 18 % rate. Sanskari GST has taxed Sindur at 0% but Sanitary Pads at 12%.
Claims are many and thus it is important that we understand GST without its celebratory hype. Since the celebrationist account of GST can be found everywhere (news channels, newspaper, social media, chit chat with the public), below I try to give the economic analysis of GST in a non-celebrationist fashion.
1.Rise in GDP: Statistical fraud
First, as claimed by many commentators that introduction of GST will increase GDP by two- three percent. But there is no such strong empirical study done in India which shows that is the case. Extrapolating studies done in other economies with different economic structural features is nothing but statistical fraud and a travesty of scientific norms of deriving conclusion. Studies done under X cannot be extrapolated to be true for Y until the economist is able to show that both X and Y are structurally similar economies. Given India being service-dependent economy (60% of GDP) and with the implementation of GST tax on services is going to rise, this can only have a contractionary effect on output. Even NITI aayog Economist- Bibek Debroy has said that claim of GST will lead to rise in 2 % of GDP is nothing but rubbish.
2. Adverse Impact on Employment: Small and handicraft sector at Doldrums
Also most of the small, medium enterprise/firms/companies which are the largest employer of the labour force and make a large contribution to GDP, will find difficulty with coping with new system and will thus lead to a rise in compliance cost. Also for lakhs of Kirana shops with no experience of account keeping and with no access to internet and computer, complying with GST will be very difficult. Implementation cost is huge and will only lead to the creation of grey market and diversion of most activity beyond tax authorities scrutiny. It is an administrative nightmare for everyone. Also, the proposal of including Handicrafts under GST within 18 -28% slab will decimate this industry mostly located in states like Jammu and Kashmir and the NorthEastern States. The government has even refused to make a differential treatment to machine made and hand made products. Currently, handicraft items are tax exempted by both centre and State and only low rate is applied to it.
3. Revenue neutral rate: Easy to say, hard to determine
A tax rate is called revenue neutral if shifting to new tax structure will not lead to fall in total revenue collected by the Tax authorities. Since with GST there is a shift from earlier indirect tax system with multiple taxes to few tax GST system, the tax rate( 0%, 3%, 5 %,12%, 18%, 28%) under GST has to be such that it will not lead to fall in revenue for either state or central government. Different economist has derived a different estimate of revenue neutral rate. So it is not clear whether the new tax system is revenue neutral or not. If revenue neutrality is not maintained under GST, then it implies that State government revenue after GST system is going to fall leading to serious economic and political consequences.
4. Impact on State Government Revenue and Expenditure ability: Facilitating further Privatisation of public services
Since GST has replaced many indirect taxes (VAT , Entry Tax, Luxury tax, entertainment tax etc.) levied by State government, it is highly likely that State government revenue after implementation of GST will go down and their dependence on Central government will increase over time. Since most of the social sector expenditures(Education, Health, housing, rural development, Jobs programme) are done by state government only, this decrease in state government revenue will translate into reduced expenditure on these social sectors. Vast majority of population which is dependent on such affordable services provided by State face difficult times ahead. Most of the times State Government uses new indirect taxes to meet revenue shortfall to spend on different social sectors but with GST this discretionary power of State government is no more. Such a fall in State government tax revenue will imply either increase in Direct taxes or cutting of social sector expenditures. Later is the more likely outcome.This will only facilitate and accelerate the ongoing process of privatisation and commercialisation of education, health and other social services. Losers will be poor and marginalised sections of society as they are the ones who are more dependent on such State services.
5. Assault on Federal Structure: Strengthening of Unitary features
As explained above, the fall in State Government revenue due to scrapping of multiple indirect taxes to Single tax and withdrawal of discretionary power to impose new indirect tax to meet revenue shortfall will only lead to more and more dependence on Central government to meet basic expenditures of State government. The uniform rate imposed by GST implies State government will lose their independence to decide their Fiscal policy according to their state needs is a serious infringement in the federal structure of Indian polity. Even under GST council the voice and influence of Centre are more than any state government as most of states are ruled by BJP only. Such changing of financial power equation will only lead to centralisation of power and weakening of already weak federal structure. Definitely not a good news for democracy.
6. Fall in tax burden of Big Business: At least Achche din for somebody
Due to Simplification and reduction of plethora of indirect tax with few taxes under GST, it will benefit the Big Business the most in terms of reduction in tax obligation to government. Since they already have access to all the logistical support (internet, computer, trained accountant) needed to implement the GST system their compliance cost will rise only marginally. In true sense Achche D in for Big business.
7. Inflation: Increasing the misery of poor
In order to collect same amount of tax revenue with few taxes, tax rates have to be higher than previous tax regime rates. Such high tax rate will only increase final price for consumers which will increase inflation in the economy. Needless to state poor, old pensioners, fixed deposit holders, marginalised communities will be adversely affected.
8. Will all the tax be passed on to the consumers?
Any first year under graduate in economics will tell you that this is not true at all. Contrary to popular opinion, the ability to shift taxes also depends on demand and supply condition of the market. If the demand for good in consideration is more price sensitive then imposing higher taxes may lead to consumer shifting to other products. Say demand for railway ticket is price insensitive (even if price goes up you tend to buy it as there is no other substitute at that price range), which implies all the tax will be borne by consumer only. So, the argument that under indirect tax system all burden is borne by consumers and hence producers/distributors should not worry about it is a plain lie. Depending on the nature of demand and supply , the taxes can be borne by either consumer or producer or both.
In short, economy which was bedridden and slowly recovering from misadventures of demonetization is further pushed to doldrums by another shock wave of GST. Bhakts are happy, taking sadistic pleasure derived from derailing economy but what they forget is that their fudging of data will not hide for long the eventual devastating economic storm.
Featured image : Tax Collector’s office by Pieter Brueghel the Younger