02 Aug 2016 22:21 IST

GST may become a nightmare to implement and maintain

The non-GST system is a mess. But the new GST may well be messier

The current drama over the Goods and Services Tax (GST) Bill brings to mind a groundbreaking legislative battle in the US.  Following a campaign promise of President Obama in 2008, the US Congress began to craft legislation to write a new health insurance law called Obamacare to offer insurance to the uninsured and increase the efficiency of the healthcare market.   

To make it work, lawmakers had to force everyone to buy insurance or else pay a tax to the government as penalty.  This raised several constitutional questions such as:  Can the government force you to buy and consume a commercial product (say, fruit) simply because it is good for you?  

To secure a buy-in from sceptical opposition lawmakers during the legislative process, the administration promised many sweeteners during the almost two-year legislative battle:  All insurance plans would include a mandatory set of benefits protected by law; and no one could be denied coverage because of a prior existing condition. And for those who could not afford the premiums, the government would kick in subsidies to cover the difference.  

Unwieldy healthcare Bill

The Bill got so large and unwieldy that many lawmakers never read it before voting on it.  The then Speaker of the House, Nancy Pelosi, became known for her 16 words, “But we have to pass the [health care] Bill so that you can find out what’s in it.”  The Bill finally passed on a strict party-line vote — all Democrats voted yes; all Republicans voted no.

Five years after its passage, Obamacare is a disappointment.  The Supreme Court had to intervene multiple times to save the Bill from constitutional challenges. Subsidised premiums are only part of the story.  Out-of-pocket deductibles and co-pays are so high that many healthy people are opting to pay the tax penalty rather than stay insured. When the healthy drop out, the risk pool worsens because the unhealthy remain. Some of the country’s largest insurers announced that huge losses are forcing them to pull out of the programme altogether. Fewer companies offering a mandated product means that costs will surely rise next year, triggering a “death spiral”.

The India GST movie thus far has been an almost frame-by-frame replay of Obamacare.  

GST gains uncertain

Proponents argue that the GST Bill, by eliminating dozens of indirect taxes and bringing all of them into a single tax, will improve tax efficiency.  Some have said that prices will fall for consumers, although no one has explained what would stop companies from increasing their MSRP to keep the selling price the same.  Some economists have predicted that a single GST will help grow the economy by as much as 1 per cent.  

While a single tax is always better than a complex web of taxes, the truth is that a lot of the GST’s benefits are all on paper.  No one knows what the GST rate would be because this will be decided by the so-called GST council, which is yet to be constituted.  Ultimately, if the prices of items that consumers are buying go up because of a higher GST, the reforms will be unpopular. The government could lower GST rates but that would mean lower revenue.  

Many currently exempt products are expected to be roped into the GST regime to compensate.  Currently, manufacturers with annual revenues under ₹1.5 crore are exempt from central excise taxes and would be deemed so under GST.  But Finance Minister Arun Jaitley has said that he wants to bring manufacturers in the ₹15 lakh to ₹1.5 crore turnover range — this includes a large number of small businesses — into the GST regime.  Prices for their products will go up and people will protest.

Services will be rolled into GST, a central feature of the Bill.  If the GST rate is higher than the hated service tax rates of today, and if more services are included under the GST umbrella, consumers will get hurt, even angry.

Taxing added value

But the biggest issue with the GST is that few of our leaders can explain what it really is, beyond the few sound-bites.  Fewer can show how it is calculated.  There are academics who use the farmer-mill owner-baker-shopkeeper value-chain example to describe the concept of taxing added value (which is what the GST is).  But even tax experts are unable to lucidly explain how GST works in a real-life manufacturing situation. 

Suppose a simple product that contains half-a-dozen parts, made in multiple States, is shipped to a factory owner in two different States who then assembles them and sells the finished product locally through his own warehouse and nationally on Amazon. What GST rate would ensure revenue that is neutral to the current tax regime?

To make matters worse, India is the only country in the world that is trying out a three-tiered GST formula where State, Central and integrated taxes have all to be reconciled.  The programme’s design and implementation will be a nightmare.  The entire regime will depend upon the business intelligence contained in the lines of code that make up the GST system and the integrity of associated data.  Sellers and service providers will have to file forms in every State they operate in.  If electronic records do not match, tax credits, which are the foundation of a VAT system, will not materialise, hurting businesses and confidence in the government.  

The current non-GST system is a mess.  But, lofty as the GST Bill’s goals may be, there is no certainty that the new GST system will not be messier. This is not something you can do over again, so the government has to get it completely right the first time. A scary proposition indeed.