Posts Tagged ‘GST’

GST: Great Source of Trouble

Wednesday, November 22nd, 2017

GST: Great Source of Trouble

By

Col (Retd) Bhaskar Sarkar VSM

GST was introduced with much fanfare by the BJP Government on 1 July 2017 following the passage of the Constitution 122nd Amendment Bill. It is applicable throughout India and has replaced multiple taxes levied by the Central and State governments. The GST is governed by a GST Council. Its Chairman is the Finance Minister of India with members from State and Central Governments. Under GST, goods and services are taxed at a number of rates, 0%, 5%, 12%, 18% and 28%. There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on gold. In addition there is a cess of 22% on top of 28% GST on a few items like aerated drinks, luxury cars and tobacco products. GST replaced a slew of indirect taxes like exercise duty, sales tax, octroi tax, entry tax, import duty, service tax, entertainment tax etc with a unified tax. It is expected reshape the country’s 2 trillion dollar economy. The Government claims that GST is easy to administer, helps check tax evasion and reduces the cost of tax collection. The Government also claims that the prices will come down because of GST.

Infosys is building a gigantic electronic infrastructure to control the process which is expected to serve about 7.5 million businesses, 500 million consumers and possibly 10 trillion transactions per month over 4 metros, 7 semi metros, thousands of towns, hundreds of thousands of villages spread over 29 states and five union territories some of which are not yet connected by road or electricity. It is not out of place to mention that out of our one and a quarter billion population, only about 1% pay income tax, 3% understand English and about 2% can use a computer. The situation is further complicated by the fact we have three types of GST, Central GST, State GST and Integrated GST and five different rates excluding the special rates and cesses. This gigantic and complex system with a plethora of reports, tax collection, tax credits and refunds is to be implemented by Central and State departments who have been at war over jurisdiction (mainly over share of illegal gratification they have been used to receiving). I hope my readers understand what our Government has bit into.

It is not out of place to mention that only seven countries in the world, Singapore 1994, Australia 2000, Canada 2008, New Zealand 2010, Malaysia 2015, France 2015 and India 2018 have GST. 152 major economies including the US, UK, EU, China follow VAT. Most countries have only one GST rate.  The lowest is Canada 5% and highest New Zealand at 15 %. Only Canada has Central and state GST. With this background information, we can now examine the problems being faced.

Troubles for Manufacturers

The accounting costs are likely to increase as calculation of cost of inputs and value added will be complex.

Initial tax payment will be large as the tax paid will be on cost of inputs as well as value added.

Delay in getting tax credits is a serious problem which can create cash flow problems particularly for small and medium size industries. GST system with multiple tax brackets has inherent problems, as the taxes on intermediate goods are in some cases higher than the tax on the final products in which they are used. Thus there may be cases where tax credit will be more than tax paid.

Troubles for Distributors for Whole Sellers

In GST, the supplier will be liable to collect tax on goods and services provided. This provision will have serious adverse impact on unregistered dealer business as most of the companies will try to not to deal with unregistered dealers to avoid unwanted additional compliance burden.

Troubles for traders and Retailers

The first and major problem is preparing the monthly returns. The GST returns are complex and even taxmen who are not computer savvy find them difficult to fill. Even if the returns become quarterly as is the case in some countries using GST, it is a major problem for those traders and retailers who are not computer savvy. Hiring professionals is costly and professionals have taken advantage of the large demand and hiked their rates.

There is also the problem of charging the wrong rate and getting penalized.

Troubles for the Tax Professionals

GST is absolutely different from existing system of indirect taxation. It, therefore, requires that tax consultants to be trained properly in terms of concept, interpretation, legislation and procedure for preparing returns, claiming tax credits etc. This will take time.

In the absence of a uniform legal procedure for tax disputes, tax professionals will have difficulty in helping clients sort out their client’s problems with tax authorities. Litigations may increase.

Several transactions can be classified sales or as services. Thus there will be disputes in determining the nature of transaction.

Troubles for the Hospitality Industry

GST has led to rise in tariff. But hotels are unable to raise prices of rooms booked in advance. He will suffer some losses. Increased tariffs could lead to fall in occupancy and more losses.

There would also be problems in calculating value addition. For example branded atta attracts 12% GST while unbranded 0%. On what rates will input cost be calculated?

Troubles for the Consumers

The GST rates are too high on many products. For example, service tax has increased from 12% in 2014 to 18% under GST now. High taxes can lead to increased tax evasion, inspector raj and corruption, lower demand and thus lower tax collection, and higher prices. There is a risk that it may lead to short-term inflation.

The main problem with consumers is increased cost. I bought a mixer grinder worth Rs 2000 and paid Rs 560 as tax. Is this fair?

The other problem is availability. Dealers are not supplying items to small cash traders as the tax trail is not clear. This is causing scarcity in rural areas.

Troubles for the Taxmen

It is well known that it takes a fair amount of time for any software to be debugged. When the system is so vast, debugging the system is going to take time. Tax credits and refunds are getting delayed and the tax men and the government are being blamed.

Many offices of customs and exercise at district levels have not yet received the hardware and software. The end of the financial year is only about four months away. It is difficult to see how chaos is going to be avoided.

GST is absolutely different from existing system of indirect taxation. It, therefore, requires that tax administration staff at both Centre and state to be trained properly in terms of concept, interpretation, legislation and procedure for dealing with returns, tax credits etc.

There has to be a uniform legal procedure for tax disputes and litigations to avoid any confusion. This is yet to be put in place.

With the transportation services available everywhere, the place of sale and consumption may not be the same. This makes it difficult to go forward with revenue allocation.

There are various definitional issues related to manufacturing, sale, service, valuation etc. arises. These need to be rationalized.

Troubles for the Economy

The first and most important problem is Central Government’s loss of revenue. As per Mr. Vanaja Sharma, Chairperson Central Board of Exercise and Customs (CBEC) (as reported in Times of India, Jaipur Edition of October 30, 2017), the Government had targeted 9.7 lakh crores collection from Customs and other indirect taxes in its budget for the current fiscal. Keeping in view the GST rollout this target was unlikely to be achieved. What will be the shortfall is difficult to project. Right now the CBEC was acting as a facilitator and not penalizing anybody.  A serious shortfall will seriously affect Government spending and will result in low profile spending on healthcare, education, rural development etc. Job creation will stop and even retrenchments could take place. There could be distress selling of Public Sector assets to make up revenue shortfall.

The state governments will also face serious revenue losses. They cannot print notes or sell public sector assets. Government servants will not be paid in time. Even without GST problem, the Rajasthan State Transport Corporation employees have not been paid salaries for over three months. State governments are demanding compensation from the central government for five years as they foresee a major dent in the revenue due to sales tax revenue losses. The central government has agreed to 3 years. Only God knows what will happen when the loss of revenue due to GST will be known in April 2018.

Manufacturers of consumer goods and two wheelers will be in serious trouble. Their sales growth which was mainly in the rural areas will turn negative. Rural economy is totally cash oriented as there is only one bank for every 10 or more villages and small traders and vendors cannot accept digital payments. How this interface between the small traders and consumers in the cash economy and GST paying whole sellers in small towns work is yet to be seen. Diwali sales this year was down about 30%. Drop in sales will result in job losses, agitations and increase in crime.

There will be no growth in employment as private and public sector players face severe cash crunch. The number of educated unemployed will increase from the already monstrous 50 million. Demands and agitations for reservations will increase. Law and order will deteriorate.

It is not clear as to how the GST system caters for reconciliation of numbers of items produced and sold which will differ due to losses in transit, storage, accidents, thefts, expiry of shelf life, rejection during quality check and a host of other causes. Our sharp businessmen will no doubt exploit any loophole and cheat on taxes as they have done all these years.

Initial tax collection on introduction of GST is high and creates euphoria in governments. But this is going to be short lived as up to 65% may have to be refunded as tax credits. Governments will be in trouble if they over spend.

Conclusion

By opting for GST, our Government has taken a gigantic leap into the unknown. I can only hope they have looked long and hard before they leapt. The Government claims that GST will benefit the country in the long run. Mr. Yashwant Sinha, Finance Minister in the Vajpayee Government, says that we will be dead by the time things get better. Mr. Chetan Bhagat, Columnist and self proclaimed “Under age optimist” has pleaded with the Government to make things simple. Mr. Subramanium Swamy, BJP MP, calls GST a disaster and a national security risk. In the age of cyber attacks and warfare, total reliance on a digital system is likely to be risky. I, the self proclaimed “Over age rational pessimist” will hope for the best and try to prepare for the worst, a bankrupt government, unable to pay my pension. World Bank and IMF certificates and accolades do not guarantee my pension. Only sound, pragmatic and implementable economics policies and adequate government revenue can.

May God save India