The nation is waiting for another parliamentary discussion on the Goods and Services Tax (GST). The last one was in December 2014 when the Constitutional Amendment Bill to make it possible was introduced. This is perhaps the most important fiscal legislation since the value added tax (VAT) introduced in 2005. This proposed tax will replace all indirect taxes including VAT.
Indirect taxes are the main source of tax revenue for the government. When we purchase commodities and services as final consumers or as producers, included in the bills are familiar taxes like central excise tax, countervailing duty, state VAT, sales tax, service tax, octroi, entry tax, luxury tax, all of which will now be replaced by one GST. That is why a constitutional amendment bill was needed to insert an article in the Constitution making legislation on goods and services taxes a concurrent power of the centre and states. Some of these taxes are levied by states.
Public finance theory recommends limited use of indirect taxes (taxes on goods and services) because the tax is paid equally by all who consume the goods or services, by the rich and poor in the same proportion for every unit consumed. Thus, as a percentage of their consumption expenditure, a poor person will end up paying more taxes. This is detrimental to the principal of equity which requires the rich to pay proportionally more than the poor. Hence, the significance of raising public revenues from direct taxes instead, on income, corporate profit, wealth and inheritance taxes.
Over the past few decades, there has been a tendency to limit and reduce the use of direct taxes. Arguments most commonly held out to support this is that high direct taxes discourage tax compliance and wealth accumulation. The former suggests that the state does not have the political or administrative capacity to collect direct taxes, and the latter is supposed to be detrimental to growth. We are told that whatever is detrimental to growth is damaging to job creation and poverty reduction, besides the income and wealth tax base in developing countries is supposed to be too narrow for virtuous tax practices. There is overwhelming evidence now that wealth has been accumulating at the top end of Indian society, inequalities have widened and not enough decent jobs have been generated to redress poverty, but indirect taxes continue to remain the top revenue earners. Some would suggest this is the ‘trickle up’ theory at work.
The stated motivation behind this change in indirect tax regime is to create a single Indian market, unify the system as far as possible across states, sectors and increase the tax base to include all goods and services, as far as possible. This will inhibit states from reducing taxes to attract investments, a tendency that has been harming revenue collections since liberalisation.
It is yet to be determined what rate structure will exist for different commodities and services. A proposed GST Council of representatives from states and centre will determine the details. Will the tax burden on the masses rise when they buy necessities like edible oils, processed foods, baked items, FMCGs (Fast Moving Consumer Goods), internet and mobile phone services? By all accounts, the proposed 18 % tax or thereabouts will make these essentials more expensive. This will be added to the already rising food prices. At 18% GST India will approach the ranks of high tax European countries like UK. The Indian citizen may rightly suspect that she may get nothing at all in return? After all, we are not expanding or strengthening the public health, education, housing or the social security system right now.
On the other hand, nobody doubts that having a unified tax system will improve logistics and the national supply chains for large organised retailers, e-commerce, manufacturers and suppliers. They will save time and money as trucks plying between states move faster with no stoppages or additional taxes at state boundaries. The enhanced public revenues will be used to develop more roads and ports to expand national and international supply chains, further penetrating local markets everywhere.