Why some economists think GST is over-hyped: It won’t help you or me

While the big political brouhaha over the Goods and Services Tax (GST) continues, several experts on economy feel the proposed tax is low on substance and massive on hype.

On Wednesday, the government inched closer to clinching a deal by clearing changes in the GST Constitutional Amendment Bill, dropping 1 percent manufacturing tax and providing guarantee to compensate states for any revenue loss in the first five years. While it would like to call the GST a historic leap, the ultimate game changer in the economy, this section of economic experts believes that the so-called biggest tax reform in India is only big talk.

And, they have their reasons to believe so.

Arun Kumar, former Sukhamoy Chakravarty Chair Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, raises the most pertinent question on top of everybody’s mind today. He asks, “Will consumers benefit due to lower prices?”

Kumar says that this is just one of the many questions that should be asked if GST is implemented. He says that the argument about a fall in prices is wrong.

“Undoubtedly, there would be simplification in the tax regime faced by businesses but not as much as is being made out. There will be three taxes — CGST collected by the Centre, SGST collected by the states and an IGST on inter-state movements collected by the Centre. Further, under pressure from the states, alcohol, tobacco and petro goods are likely to be left out of the purview of GST. So are electricity and real estate being left out of the GST net and will have separate taxes resulting in some cascading effect. Services did not have to pay sales tax earlier but will now have to pay the SGST to the states so their prices will rise. For instance, telephone calls, insurance, transportation, restaurants, etc. will become dearer. A common tax rate will imply that all basic and essential goods prices will rise, and even if some final goods prices fall, the rate of inflation will go up,” he points out.

According to Kumar, a common rate for all states undermines fiscal federalism; because different states have different requirements.

“The real problems with the introduction of GST in India have not been addressed. The unorganised sector in India employs 93 percent of the workforce. The small and tiny units producing and selling locally would lose from a unified market which will benefit large-scale producers. This will aggravate under-employment, distress in the farm sector and adversely impact the poorer states. No wonder, GST is being strongly backed by large businesses — foreign and Indian. Just because VAT exists in more than a hundred nations is no reason that it would uniformly benefit all in India,” adds Kumar, former Sukhamoy Chakravarty Chair Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University.

Jayati Ghosh, professor of Economics at Jawaharlal Nehru University concurs.
“GST is a massively over-hyped phenomenon. It has been touted that GST will have massive impetus on investment and growth, but in fact the effect will be marginal. It’s a convenient excuse that as GST is not there, growth isn’t taking place.”

As far as creating a national market is concerned, with a uniform single tax regime across the country, Ghosh criticised it saying over-centralisation had never benefitted India.

“Same is in the case of GST. It’ll be a cosmetic reform to show the world that India is doing reforms. In the last two years, investment has failed to pick up. We’ve witnessed massive rise in non-performing assets in public sector banks,” adds Ghosh.

Former RSS-BJP ideologue, KN Govindacharya considers the hype in GST issue more due to its political overtone.

“Right now GST has been over-hyped as it has become a political issue. Congress wants to stall the bill, simply because the BJP wants it to get implemented. The basic objective of GST is simplification of tax structure and a unified taxation. But, it needs to be seen whether that objective is being fulfilled or not,” he says.

Govindacharya too underscores the apprehensions a common taxpayer has in mind regarding the proposed indirect tax regime. “First, will new taxes would be added in future, once GST is in place? If, the maximum cap is 20 percent, people don’t want any other tax to be added to it. Second, at present the total tax comes to 33 percent, whereas GST talks about 18-20 percent tax rate. What will happen to other taxes and duties like Octroi, Excise duty, Customs duty, etc? Third, prices of commodities and services will go up. Fourth, role of tax department and its officials — will they continue to hound taxpayers?” he asks.

“The government has to come up clear on these issues. In the last one year, no consensus could be reached as a majoritarian approach was adopted and there had been no coordination and cooperation between the Centre and various stakeholders,” adds Govindacharya.

Former agriculture minister in the Atal Behari Vajpayee government, Sompal is relatively optimistic about the GST regime.

Stating GST as the biggest tax reform since Independence, Sompal opines that anything politicised, is over-hyped; and so is with GST. “Now, the NDA government says GST needs to be implemented in national interest, but it’s the same BJP-ruled states like Gujarat, Madhya Pradesh, etc who strongly opposed GST in the past, when the UPA government mooted it in 2009. Whatever hype we see, is due to politicisation. However, there’s no hype in the economics of GST. Its advantages are more than its disadvantages.”

According to Sompal, who was a member of the 12th Finance Commission, while there are several advantages in this tax reform like doing away with multiplicity of tax, uniformity, single rate that will usher into a single market, all transactions under a single umbrella, etc, there are disadvantages as well that needs to be addressed before implementation.

“The common man has serious concerns like at present service tax is charged at 12 percent, but when GST will be in place, it’ll be at 18 percent. This will make some of the services costlier. Moreover, the two issues raised by the Congress — one regarding uniformity (1 percent differential taxation) and second, to get GST rate capped in the Bill, are important. The government wants that instead of mentioning the rate in the Constitution, it should be mentioned in GST law. Here, the apprehension of consumer lies because in the long term, the rate of taxation will be on the whims and fancies of tax administrator and the government. What if it’s changed? The government has to ensure its commitment,” adds Sompal.

However, a good news is that the Cabinet on Wednesday cleared changes in the GST Constitutional Amendment Bill, dropping 1 percent manufacturing tax and providing guarantee to compensate states for any revenue loss in the first five years of rollout of the proposed indirect tax regime. By doing away with the 1 percent inter-state tax over and above the GST rate, the government has met one of the three key demands over which Opposition Congress has been blocking the Bill in the Upper House.