An enigma called GST

If one is a follower of current news in India, one must have come across the strange/political bonhomie/time/money wasting play acting by various politicians (usually state level) on the issue of imposition of Goods and Services Tax or the GST in India.

For a long time Indian tax system was considered complex and inefficient; to change this attitude/outlook there were many committees formed and many reports passed around. Some of the notable ones are Chelliah Tax Reforms Committee, 1991, Bagchi Report, 1994, Task Force on Indirect Taxes, 2002, Kelkar Committee Report, 2004. Almost all these reports without fail reported on the huge number of hurdles on calculating the correct figure of tax. The laws were complex, more than one law had jurisdiction on the same subject leading to confusion, add to that the bureaucratic apathy and no wonder India brought up the rear in the list of countries in providing an efficient tax system.

One of the best ways to have an efficient tax system is to follow the four principles of equity, certainty, convenience and economy in taxation as described by Adam Smith in 1776. Over years this has been modified by scholars to suit variations and to get a better adage (look at the table below as sourced out from a working paper).

Criteria for an Efficient Tax System
Author	Criteria	Title	Source
Adam Smith 1776	Equality, certainty, convenience of Payment, economy in collection	Canons of taxation	Smith A, An Inquiry into the Nature and causes of the Wealth of Nations (selected ed, 1993) p 450.
Carter Report – Canada 1966	Equity, Neutrality, Transparency and Accountability, certainty, Simplicity, Flexibility	The Use of the Tax System to Achieve economic and Social Objectives	Canada, Report of the Royal commission on Taxation (‘carter Report’) Vol 2, The use of the tax system to achieve economic and social objectives (1966) ch 1.
Asprey Report – Australia 1975	Fairness, efficiency, Simplicity, growth, Stabilization	Criteria for Tax Systems	Taxation Review committee (‘Asprey Report’), Full Report (1975) 13.
Meade Report – United Kingdom, 1978	Incentives and economic efficiency, distributional effects, International Aspects, Simplicity and costs of Administration and compliance, Flexibility and Stability, Transitional Problems	Characteristics of a good Tax Structure	A Report of a committee chaired by Professor Meade Je (‘Meade Report’), The Structure and Reform of direct Taxation (1978).
HMSO green Paper Report – United Kingdom 1981	Practicality, Fairness, Accountability, cost of Administration, Fiscal dimensions, Financial control	Requirement of a Local Tax System	HMSO 1981, Alternatives to domestic Rates, cmnd 8449.
O’Brien Report – Ireland 1982	Equity, efficiency, Simplicity, Low Administrative and compliance costs	Criteria For a Tax System	A Report of a committee chaired by O’Brien Mh (‘O’Brien Report’), 1st Report of the commission on Taxation – direct Taxation (1982).
Ridge and Smith 1991	Administrative Feasibility economic efficiency equity and Accountability	Criteria for Local Tax	Ridge M and Smith S, Local Taxation: The Options and the Argument (1991) IFS: Report Series No 38.
Jackson 1994	equity or Fairness, certainty, convenience of Payment, economy in collection and compliance, Transparent	Characteristics of an efficient Tax System	Jackson PM, ‘efficient Local government Finance: The Never ending Story’, in Terry F (ed) Towards Restructuring: The dimensions of change in Local government, (1994) 55-62.
OECD (Ottawa) 1998	Neutrality, efficiency, certainty and Simplicity effectiveness and Fairness, Flexibility	Taxation Framework conditions (for electronic commerce)	Committee on Fiscal Affairs, ‘electronic commerce: Taxation Framework conditions’ (1998) (‘Ottawa Taxation Framework conditions’).
ICAEW Tax Faculty 19991	Statutory, certainty, Simplicity, easy to collect and calculate, Properly Targeted, constant, consultation, Regular Review, Fair and Reasonable, competitive	Principles for a Better Tax System	ICAEW Report 1999, Towards a Better tax System, Tax Faculty: Tax guide 2/00.
James and Nobes 1997	efficiency, Incentives, equity, macroeconomic considerations	Principles of Taxation	James S and Nobes c, The economics of Taxation: Principles, Policy and Practice (updated 7th ed, 2004).
American Institute of certified Public Accountants 2001	Equity and Fairness, certainty, convenience of Payment, economy in collection, Simplicity, Neutrality, economic growth and efficiency, Transparency and Visibility, Minimum Tax gap, Appropriate government Revenues	Guiding Principles of good Tax Policy	American Institute of certified Public Accountants, Inc Tax Policy, (‘AICPA’) concept Statement 1. ‘Guiding Principles of good Tax Policy: A Framework for evaluating Tax Proposals’ (2001) 6.

However if we again look at the prevailing indirect tax system we would have to conclude that we are a far shy from anywhere near a perfect tax system. Look at our professional tax regime, if one is a professional one needs to pay professional tax but if the same service is provided by a non-professional then there is no tax except for the service tax. Also the very number of tax statutes to cover the gamut of over a 2 tier government structure is mind boggling.

In the Central Level there are:

• Custom Duty

• Central Excise Duty

• Service Tax

• Central Sales

• Telecom License Fee

• Countervailing Custom Duty

In the state level there are:

• State VAT

• State Excise on few products

• Luxury tax

• Entry tax/octroi

• Tax on consumption

• Other ancillary taxes

Some sighed in relief when VAT or the value added tax was sought to be introduced in 2000. However the relief was short again partly due to piecemeal nature of the legislation. There was serious holes in a legislation which sought to uniformize the indirect tax system. However the VAT system with its dual state VAT and CENVAT had scores of deficiencies namely:

• High Compliance and Administrative cost;
• Adverse impact on competitiveness of indigenous goods and services;
• Complex tax structure in the presence of several taxes e.g. excise, customs, service tax, state vat, octroi etc;
• Cascading impact of Taxes- CST/Octroi/Entry tax etc. are not allowed as input credit- reversal of input tax credit in case of branch transfer to other state; it encourages setting up separate warehouse/depot in consuming states to avoid CST thus lead to unsustainable high cost distribution models;
• Over-lapping of tax base in case of several taxes in operation- certain goods are subject to VAT as well as service tax;
• The taxes on inter-state movement of goods create tax barriers within India. It holds back India from becoming a single national market;
• Separate and independent tax legislations increases litigation, uncertainty and harassment;
• Multiple rate structure of different taxes in the state leads to severe tax distortion. The wide spread taxation of inputs at different stages encourages vertical integration of firms only for tax purpose and not based on economic consideration

To explain with an example, say a person in Kerala manufactures candle and he wants to sell them in West Bengal, so he first pays excise duty in Kerala and when he passes each state boundary he will pay octroi, after reaching West Bengal and locating a dealer once he sells the candle to the end consumers he will have to pay sales tax and will get no input credit for the excise and octroi under the current system. So the end cost of the candle would be many times higher than the original production cost. Under GST these interstate taxes would be abolished and there will be provision for input tax credit even when the material is sourced outside of the buying state. This would lead to the true economic integration of India as envisaged by the Constitution. Thus there was need for an upgrade, it came in the form of proposed Goods and Services Tax (GST). The first decision by the Joint Working Group (JWG) on GST was to propose a dual GST with all its pit falls it would have been nothing better than the existing VAT with availability of credit at all levels. However recently the JWG has proposed a three tiered system which would enable GST in India. From experience we know that one of the major problems of indirect tax system in India has been the multiplicity of laws and VAT sought to cure it but even a dual VAT was inefficient and so would be the proposed three tiered GST.

The proper model in India for implementation of GST would have been the Kelkar-Shah Model: This model of a unified GST, it is based on a grand bargain to merge central excise, service tax and state VAT into one common base. Two different rates of tax are to be levied by the Centre and the states. The collection may be by the Centre and then proportionally divided between states and centre. This is like the GST model in Canada. This system would mean one authority both for collection and implementation. The rate can be fixed by an empowered committee and thus would pay deference to the Constitution of India which has provided a provision for a dual taxing structure. Also a single authority would reduce obsufication and multiplicity of jurisdiction, also it would lead to one window clearance. Thus we would have all the advantages of VAT and none of its present disadvantages.