GST: When people are made to pay for making it easy for Big Business

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GST: When people are made to pay for making
it easy for Big Business
By
Zubin Poonawalla
Just imagine: my neighbour has been renovating his house for the past few months. He has
broken down the edifice, perhaps he thinks it is outdated now, & is using modern architecture
incorporating landscape designing. I am sure the renovated house will surely look ultra
modern, with strong geometric shapes & swanky looking interiors, & would certainly be far
more functional.
But what if my neighbour were to later send me a fat bill to share his construction costs? This
is not done, anyone will say. After all, why should I be made to pay for the renovation work
my neighbor decides to undertake.
This is exactly what we are being made to overlook in the entire discussions happening
around the ‘path-breaking’, ‘historical’ & ‘game changer’ GST. I have heard the Finance
Minister Arun Jaitley say time and again how GST will be game changer for India Inc. The
GST, which certainly is a tax reform, will replace all the existing indirect taxes like central
excise duty, sales tax, value added tax, luxury tax, service tax, octroi & so on. It is expected
that GST will greatly reduce the cascading effect, as a result of which growth is likely to
increase by 0.9% to 1.7% of GDP.
I had always failed to understand why a cumbersome tax regime was in operation all these
decades. Not only would a plethora of taxes, or as some say tax over tax, add not only to the
cost of a product but the system merrily allowed rampant corruption at every stage of tax
collection. Whatever be the reasons, the reality is that consumers paid the final retail price
even if it was on the higher side. The producer had to live with the hassles of a laborious
multi-tax regime whereas the end cost – in the form of a higher price -- was always borne by
the consumer.
The GST will now provide a hassle-free tax regime for the goods producer. Instead of multiple
taxes on goods & services, & at multiple entry points, there will only be a single tax to be now
paid. Whether it finally increase the growth rate is beside the point, but what is more
important is that it will create an environment conducive to making it easy for business.
While it makes it easy for business I fail to understand why the consumer is being made to
bear the ultimate cost. Like I shared the story of my neighbour’s house under renovation, the
GST is also essentially a renovation of the prevailing multi-layered tax regime. I am sure you
will agree that the cost of renovation should be paid by those who are undertaking the tax
reform. If India Inc is the real beneficiary, as we all know, they should be asked to pay for it.
Instead, the cost is being very conveniently passed on to gullible consumers.
To prepare the consumers to absorb the high GST rate, Arun Jaitley had raised the service
tax in Budget 2015 from 12.36 to 14 per cent. We will get to know only at the time of the next
Budget in 2016 as to how much money has been extracted from common man’s pocket in
2015-16. Just to give you an idea, service tax alone had yielded an additional Rs 50,000-
crore in the previous fiscal. If I go by the progressive increase in service tax collections, and
knowing that service tax will merge with single rate GST which is expected to have a standard

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rate of 18 per cent, the additional annual fiscal burden on the ignorant masses will be
somewhere around Rs 2.5 lakh crores.
In other words, the entire cost of undertaking GST reforms is to be borne by the consumers.
The sole beneficiary – India Inc – gets away without paying anything. World over, Big
Business has managed to pass on the entire cost of tax reform onto the gullible public. Not
even one government had the courage to question this. That shows how well-trenched the
economic thought (or ideology) is in the minds of economists as well as the policy makers.
This is certainly the outcome of deft programming through the Econ 201 or Econ 301
academic curriculum.
Since the GST is a single rate, service tax has to be merged with it. This makes economic
sense. But this is perhaps also essential to ensure that the existing revenue collections –
measured in the form of Revenue Neutral Rate (RNR) – do not fall. The drop in revenue from
the existing multi-layered taxation system is therefore certain. To make up for the shortfall,
the best way is to further tax the common man. A careful perusal of the Report on the
Revenue Neutral Rate & Structure of Rate for GST submitted by a team headed by the Chief
Economic Advisor Arvind Subramaniam clearly brings out the deliberate effort to keep a
higher rate of collection. It suggests a RNR of 15% - 15.5% with a dual rate of taxation at 12%
for some goods & the remaining at a standard rate of 17% -18%. The committee itself admits
that the RNR is at best a guess estimate.
It mentions that among the 160 countries that have introduced VAT – & GST is a form of VAT
– there are problems. Whether in the countries adopting single rate GST or double rate GST
like proposed for India, there are challenges. Even among the large economies with federal
structure, like European Union, Canada, Australia, Brazil & Indonesia, there are huge
problems with implementation. I am not getting into implementation problems that are likely to
appear but simply look at the additional burden that the common man will come under.
The report states that in a number of economies like Australia, Canada & New Zealand, GST
implementation resulted in a steep inflation. To say that the rate of increase in prices will later
come down, as has been seen in those countries, is nothing but economic jugglery. Take the
case of prices of pulses. In Between June-October the price of common man’s dal zoomed
from an average of Rs 70/Kg to Rs 170-200/Kg. If at present the prices have come down to
Rs 120/kg, the rate of inflation is certainly lower considering the base level. But effectively,
the prices have gone up from Rs 70 & have now stabilized at Rs 120/kg. Any further increase
in dal prices next year will be measured from the base of Rs 120/kg.
In addition, a higher service tax creates a domino effect. Raising the service tax alone is a
good enough reason for the price rise that is expected. The report has listed 24 services,
including travelling, hospitality, entertainment, insurance, freight, repairs of building &
machinery, royalty, professional/consultancy fees, telephone & gifts. This additional tax
burden notwithstanding, the resulting rise in inflation in addition becomes an indirect tax.
Therefore practically you get taxed twice.
Petroleum (only in initial years), electricity, real estate, alcohol are outside the ambit of GST.
The report estimates that petroleum & alcohol are biggest revenue sources for the States
fetching 29% of overall indirect tax revenue and 41.8% of total revenues of States to be
subsumed under GST. Since GST will have a two tier structure – taxes levied by Centre
(CGST) & others by States (SGST) – the duplicity alone will take away much of the
advantage that is being cited. For instance, Finance Minister said in Parliament the other day
that the day he lowered excise duty on fuel, he found many States raised VAT
simultaneously.
So far we are only being made to believe that a maximum of 18% will be the standard tax
slab. But the fact that the Finance Minister is not willing to make it a Constitutional limit
indicates that the upper limit is still open. Many experts believe that once the GST rate is fully
harmonized the two rates to be followed would be a low of 12% & a high standard rate of 22

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%. There can be no denying that the probability for the service tax to be eventually raised to
22% exists. This is the reason why the Government is not willing to cap the upper limit.
There was no hue & cry when the service tax was raised from 12.36% to 14% this year. This
was further raised by 0.5% calling it a cess for Swatch Bharat. In such a gradual & phased
manner service tax will be raised periodically so as to enable the consumer to absorb the
additional tax burden. Jor ka jhatka dhire see, (buffer the blow) as they say.
What is therefore important is to ensure that the burden of a GST tax reform is not passed on
to consumers. This must be explicitly stated in Parliament as well as in the GST Model Law
that is being prepared. The only way this can be done is to put a cap on the upper limit of
service tax. Since India is planning to adopt a dual rate policy – my suggestion is to club
service tax along with the lowest rate of 12 per cent. The standard rate, which is likely to be
18%, should be a flexible rate but the lowest slab should never be allowed to be raised
beyond 12%. Expanding the tax base & doing away with the numerous tax exemptions to
Corporate, which is around 2.7% of GDP, is a sure way to add onto tax revenues.