GST, GST and GST

“Only two things are certain in this life – death and taxes.” – American author Mark Twain

I have written this article before 20-30 days. But for some reason I couldn’t post this.

So what is GST? I think you must hear something about GST. So I am not going to repeat everything. I am explaining some issues. Implementation is not my concern as it is routine now but there are some INBUILT problems. Before that I would like to discussion some historical aspects of TAX REFORM in INDIA. You might know that India is quasi federal state. So there is a division of tax powers between central and state governments.
State taxes are – Agricultural personal income, sales taxes, excise on alcoholic beverages, state transport taxes, some property taxes, electricity taxes etc.
Centre taxes are – Non-agricultural personal income and wealth taxes, corporate profit taxes, customs and excise duties (now manufacturers’ VAT) of manufactured products.
Some tax reforms are –

1)      The Income Tax Act, 1961 – result of recommendations from ‘Income-tax Investigation Commission’ headed by Sir Srinivasa Varadachariar in 1947, ‘Taxation Enquiry Commission’ of 1953-54 constituted under Dr. John Matha, by Nicholas Kaldor and ‘Direct Taxes Administration Enquiry Committee’  (Tyagi Committee, 1958).

2)      Post 1961 –

·         ‘Committee for Rationalisation and Simplification of Tax Structure’ (Under Bhoothalingham) recommended measures for rationalization and simplification of personal income tax and corporation tax.

·         ‘Direct Taxes Enquiry Committee’ i.e.  Wanchoo committee (1971). This Committee is very important as far as tax evasion and black money is concerned. According to this committee high tax rates, controls, licenses and ineffective information system were major problems in Indian direct tax system. Committee also suggested the reduction of effective top marginal rate to 70%. Another Committee under K.N.Raj in 1972 suggested a novel option to bring agricultural income under income tax net through integrated system of agricultural and non-agricultural income. Personal income tax rates in India were quite high in earlier times. At its peak in 1973-74, the maximum marginal rate of tax (with surcharge) was as high as 97.75 per cent. Keeping in view the recommendations of the Wanchoo Committee (1971), marginal tax rates were reduced gradually to 50% in 1985-86.

·         As far as indirect tax reforms are concerned, committees like L.K. Jha, Raja Chelliah (father of Indian Tax reform). L.K. Jha committee (The Indirect Tax Enquiry Report (1977)) suggested the unification of rates and creation of input tax credit, manufacturing stage value added tax (MANVAT). Modified Value Added Tax (MODVAT) was introduced by V.P. Singh government in 1986 which promised rebates on input taxes paid by manufacturer. Chelliah committee gave three reports in 1991, 1992 and 1993. Some suggestions were – reduction in the corporate tax, integration of excise duties with a Value Added Tax system, improvement in administration of taxation, computerization etc.

·         Former P.M. Dr. Manmohan Signh reduced the number of bracket to 10%, 20% and 30%.

·         Tax force on Direct and Indirect taxes (under Vijay Kelkar, 2002) some steps like increasing the income tax exemption limit, rationalization of exemptions, abolishment of long term capital gains tax and wealth tax etc. So finally wealth tax was also abolished. There was also an extension of MODVAT.

·         CENVAT was introduced in 2000-2001 (Central VAT).

·         With 88 amendment, all taxes of services put under central subject in 2003.

Now before moving towards GST, we should under the difference between direct tax and indirect tax. Indirect tax is one which is directly paid by tax payer like income tax while indirect tax is paid indirectly like tax on product. GST is indirect tax.

Now I have read some research papers and articles.  I am going to summarize one paper and one article.
GST in Malaysia: An Ungly Truth or A Beautiful Lie? written by Lim Boon Poh, Teoh Wei Chieh, Yap Wei Wah and Young Kai Han . The main object of this paper is to find the relationship between the inflation rate and the impending implementation of Goods and Services Tax (GST) in Malaysia and the short term and long term impact of GST on inflation in Malaysian context when GST is implemented. Some economists believe that the implementation of GST will significantly increase the inflation rate but this inflation will only have a short term impact on the economy. On the other hand, some economists believe that the GST will only have a small impact on the inflation. But this can be criticized as workers will demand higher wages as cost of living will be increased in next round. So the cost of production for the firm will increase. Therefore price will be increased and there would be higher inflation. Same thing is concluded by given authors. Author found that there will be price hike after GST implementation. They also accepted the second opinion as inflation will be higher in next period because of second round effect. As far as policy implications are concerned authors are in agreement with the concept of GST. Government revenue can be increased because of GST. Deficiencies in the tax collection system can be reduced after GST implication. But authors disapproved the government’s claim about GST and inflation. Inflation will be higher in both short and long run.

I found one interesting article- GST: Some less explored issues written by Arun Kumar. Indirect tax leads to increase in prices and reduce the demand. Author said that if the tax rate remains the same as earlier, the tax collection would fall as value addition is only a fraction of the value of a product. Author also informed that the cascading effect can’t be removed completely as far as some goods and services are concerned. He suggested that GST has no impact on the black money. There is no any evidence. But price of service will definitely rise. And price of some intermediate and final goods will be increased. Finally author concluded that to increase tax-GDP ratio, tax revenue has to be increase but with that prices will rise and demand will fall. And if tax revenue falls then government spending has to be reduced.

What I feel is that GST is just routine step towards new generation taxation system. For example our ancestors used to stay in hut but now we are living in proper house with AC accommodation. But we must understand the cost of staying.. That is we have to examine the cost of GST taxation. I am concerned about the price and uneven of burden of taxation. Above articles and papers pointed out that price might increase because of GST. But with that we can’t ignore the nature of indirect tax. Marginal propensity to consume (MPC) is higher for poor people and lower for richer people. So with increase in income, poor people tend to consume more therefore they might face more pressure of taxation. So without proper redistribution policies, burden of taxation might be shifted to poor people. Another thing which is also important and interesting is interest rate. Men in power want the reduction in interest rate. But if GST creates any kind of hike in price level then RBI will keep interest rate unchanged. So we need proper fiscal and monetary policy to tackle these problems of GST.
But one thing I must say, don’t expect anything because incompletion of these expectations is not good as far as socio-eco-political conditions are concerned.

References -

Income Tax Reforms in India By Anuradha Chavan Patil

GST: Some less explored issues - Arun Kumar

(http://www.tribuneindia.com/news/comment/gst-some-less-explored-issues/123518.html)
Lim, B. P., Teoh, W. C., Yap, W. W., & Yong, K. H. (2014). GST in Malaysia: An ugly truth or a beautiful lie? (Doctoral dissertation, UTAR).