Issue: January 2017
 
Home       
WEB EXCLUSIVES
 
 
Cover Story
The Indian subcontinent is among the world’s most disaster-prone areas. As per the current seismic zone map of the country, over 59 per cent of India’...
  read more...
  Managining Risks of Disasters for Sustainable Development by P.G. Dhar Chakrabarti
  The second lead article by P.G. Dhar Chakrabarti explains the link between disasters and development
  Managing Disaster Risk by Santosh Kumar
  The focus article of the issue is by Santosh Kumar, Executive Director, National Institute of Disaster Management.
  Training and Capacity Building by R.K. Jain and V. Thirupphugazh
  This article by Member NDMA and Senior Advisor, UNDP-National Reconstruction Authority, Nepal
  Role and Importance of Immediate Trauma Care by Amit Gupta and Mahesh C. Misra
  The focThe special article by Drs Amit Gupta and Mahesh C. Misra discusses the critical nature of immediate
 
 
  Goods and Service Tax-The flawless paradigm and thereafter
Dr. Debdulal Thakur
GST in a nutshell

The voters must be informed voters, and not all read economics. Therefore, from a citizens perspective it is important to understand about such critical public policies. It is well understood by all, that the 122nd Constitutional Amendment Bill is certainly the most sought after subject in Indian economy- at least as of date.? ..

Nonetheless, before moving further, it is important to understand the basic differences between GST and VAT. According to Mukhopadhyay (2014), GST can be seen as a VAT including service tax. However, strictly speaking, if service tax is excluded, it is only VAT. Added to this, for private sector or corporates, the turnover tax with a clear credit of input tax is synonymous to a VAT. Therefore, GST can be seen as a reformed VAT regime including service tax. It is important to understand at this juncture that VAT is not a progressive tax, rather it is a proportional tax wherein the same tax rate is applied across all irrespective of the income class of the taxpayers. Naturally, it has nothing to do with social justice or redistributive objectives. Having said so, it is also true that, post GST implementation there will be a single, comprehensive value-added tax on both goods and services which will be levied at every stage of a formal transaction. Since, GST will be levied only on the value added during a particular stage of production so the burden of taxation will be shifted to the final consumer. Not to worry about the magnitude of the burden because, the final consumer need not bear much heat as the taxes paid at earlier stages will be set off. Also, it will minimize the complexity that aroused due to multiplicity of taxes, broaden the tax base for indirect taxes and thus is expected to make tax evasion less attractive.

Calculating flawless GST- the as is analysis

Now, to calculate the efficiency of a VAT regime, economists calculate the VAT revenue ratio (VRR) which is simply the ratio of actual revenues collection vis--vis the expected revenue assuming a single rate and full compliance. So, from a purely revenue perspective a VRR close to unity would be preferable then otherwise. Taking all these into consideration, the report submitted to the 13th Finance Commission by the task force on GST proposed a flawless GST. In this they clearly mentioned that since there are ample issues with VRR, the task force actually expanded scope of final consumption given the constraints imposed by the National Accounts to compute the potential tax base. As per the recommendation of the said tax force , whole objective of a GST as a resource mobilizing handle, would only be successful if and only, the policy deficiencies could be removed. As per their estimates, even then a VRR would be around 0.76. According to this report one of the main deterrents to low realization was the extent of exemptions which was around 0.64 in the pool of potential tax base and thus reducing the actual collectable tax base to 0.36. One can easily, gauge about the actual collections from this meager pool of collectables. To simplify, out of every hundred rupees of potential tax baseRs.64 would be lost due to exemptions and the residue of Rupees 36 is the amount of collectable tax- so the actual collection with all possibilities would be even lower and thus hamper the revenue pool..

Added to this, to keep parity between the Central GST and the State GST a revenue neutral rate (RNR) was also proposed by this task force, using 2007-08 as the base fiscal year. The sole objective of this RNR was to ensure that the new GST regime should not end up simply as another discretionary measure for additional resource mobilization. To cross check the validity of these numbers five standard independent methods (Subtraction-Indirect Method, Consumption Method-Task Force Estimate, Consumption Method-NCAER Estimate, Shome Index Method and Revenue Method) were used and quite surprisingly, the estimates calculated by the task force were quite close to the estimates of Poddar and Bagchi (2007). Theoretically and to some extent using estimated numbers it can be said for sure that yes it is possible through GST to strengthen and give a positive scale shift in the exchequer. However, this can only be possible through a strong tax administration, compliance and with reduced exemptions.

The Ground Reality

 

The real picture emerges exactly from the above argument. Can all our state governments contribute or are able to adhere to the above restrictions (strong tax administration, compliance and with reduced exemptions) posed? A close look and an elementary athematic using data published by the Reserve Bank of India for 2012-13 (accounts) shows that the average contribution of revenue in the form of taxes in the pool of the 16 non- special category states (excluding the newly formed Telengana) taken together comes around 7.14 percent (ofcourse one may treat Maharashtra and Uttar Pradesh as outliers as they contribute the most in this pool). Surprisingly, states like Bihar, Chhattisgarh, Goa, Haryana, Jharkhand, Kerala, Madhya Pradesh, Odisha, Punjab, Rajasthan and West Bengal are positioned at the tail of the curve with contribution significantly low then the average of all these 16 states. After recalculating the figures removing the two outliers only improves the situation marginally. This essentially indicates that there seems to be something really wrong- somewhere very deep with the policy makers elected by us. Therefore, the issue is far more serious compared to what has been cautioned by the task force. It is high time for the states to realize the immense potential of GST and built or replenishes the infrastructure for a better tax administration and boosts the prospect and thereby realizes the collectable taxes, at least. On the other hand they should also realize that simply populist politics wont be helpful to sustain the bourgeoning   expenditure burden despite all prudent checks and balances.


Better India? Yes. But

Agreed, that the new regime would not only help ensure vertical equity, but is expected to restore horizontal equity as well. Also, as proposed, the Centre should provide a 100 percent compensation for the revenue loss to the state governments. But, going by the logic of the task force, there should also be counter clause as what if the state governments due to typical populist politics stars the game of exemptions or they deviate on their own from the GST base or rate which are collectively agreed upon? It is not simply the beginning of another regime or about petty benefits, rather accepting the fact that post 1991 it would be the biggest and most challenging tax reform in India (Ofcourse for a better tomorrow)- a strong political consensus is must. After all, their voice is supposed to be the echo of ours- and we all are in favour for a better India.

 

References:

Government of India (2009): Report of the Task Force on Goods and Service Tax, Thirteenth Finance Commission, Government of India, 2009.

Mukhopadhyay, Sukumar (2014): Clearing the cobwebs from the concept of GST, Business Standard, November 9, 2014

Poddar, Satya and Amaresh Bagchi (2007): Revenue-neutral rate for GST, The Economic Times, November 15, 2007.  

NCAER (2009): Moving to Goods and Services Tax in India: Impact on Indias Growth and International Trade, Thirteenth Finance Commission, Government of India.  

The author is Assistant Professor, Department of Economics, BITS-Pilani (K.K. Birla Goa Campus)

Email: debdulalthakur@gmail.com

Dial: 91-9158311248

Webpage: ​ http://universe.bits-pilani.ac.in/goa/debdulal/profile

 


 
 
Regional Languages
Hindi
English
News & Events
Regular Column
J&K Window :
Do you know? : What is Forensic Auditing
Forensic auditing refers to the auditing with the main aim to employ accounting techniques and methods to gather evidence to investigate the crimes on financial front such as theft, fraud etc.
Copyright 2008 All rights reserved with Yojana Home  |  Disclaimer  |  Contact