Briefly analyzes the macro level pros and cons of India's GST Act.

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Goods & Services Tax: Manna from Heaven for India?
Shantanu Basu
The Goods and Services Tax (GST) has excited substantial debate over the last decade. Our
Constitution divides taxation powers between Union and the states each of whom has some
exclusive areas where they can levy tax. The Constitution Amendment Act (2016) for Goods and
Services Tax (GST) re-writes hitherto constitutional indirect taxation arrangements. The Act
defines GST as any tax on supply of goods and services other than on alcohol for human
consumption. GST is a value added tax, levied at all points in the supply chain with credit
allowed for any tax paid on inputs acquired for use in making the supply. Exemptions would be
restricted to a minimum.
In keeping with the federal structure of India, GST will be levied concurrently by the Centre
(CGST) and the States (SGST) and would be similar in their design. Both CGST and SGST
would be levied on the basis of the destination (point-of-consumption) principle. Thus, exports
would be zero-rated, and imports would attract the tax in the same manner as domestic goods
and services. Inter-State supplies within India would attract an Integrated GST (aggregate of
CGST and the SGST of the Destination State).
Central taxes like, Central Excise duty, Additional Excise duty, Service tax, Additional Custom
duty and Special Additional duty and State level taxes like, VAT or sales tax, Central Sales tax,
Entertainment tax, Entry tax, Purchase tax, Luxury tax and octroi will subsume in GST.
Petroleum and petroleum products i.e. crude, high speed diesel, motor spirit, aviation turbine fuel
and natural gas shall be subject to the GST on a date to be notified by the GST Council. The Act
provides for removing imposition of entry tax/octroi across India.
Petroleum and petroleum products i.e. crude, high speed diesel, motor spirit, aviation turbine fuel
and natural gas shall be subject to the GST on a date to be notified by the GST Council.
Entertainment tax, imposed by States on movie, theatre, etc. will be subsumed in GST, but taxes
on entertainment at panchayat, municipality or district level to continue. GST may be levied on
the sale of newspapers and advertisements and this would give the government’s access to
substantial incremental revenues. For the first time, with the exception of J&K, states will have
the right to tax services.
The power to make laws in respect of supplies in the course of inter-State trade or commerce will
be vested solely in the Union government. States will have the right to levy GST on intra-State
transactions including on services. The Centre will levy IGST on inter-State supply of goods and
services. Import of goods will be subject to basic customs duty and IGST. Administration of
GST will be the responsibility of the GST Council, which will be the apex policy making body
for GST. Members of GST Council comprised of the Central and State ministers in charge of the
finance portfolio.
To understand the import of GST, it is necessary to understand the magnitude of revenue
collections in the indirect taxes category. In 2014-15 (BE), customs collections were estimated at
Rs. 2.02 lakh crore, Union excise duties at Rs. 2.06 lakh crore and service tax at Rs. 2.16 lakh
crore. Against this, indirect taxes imposed by states were estimated at Rs. 8.65 lakh crore.

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Indirect taxes account for 67% of the total revenue of Rs. 22.38 lakh core in 2014-15. Thus GST
would cover 67% of the nation’s revenues, hence its criticality to our economy.
Debate on the positives and negatives on the GST Act are evenly dispersed. On the positive side,
experts’ claim that a unified market would emerge, that would make investment easier and
enable Indian goods and services to compete in the global market. It would dramatically reduce
leakage of revenue and cut down on corruption that is endemic to the present fragmented indirect
taxation structure. Harmonization of center and State tax administrations would reduce
duplication and compliance costs while automation of compliance procedures would reduce
errors and increase efficiency. Inter-state procurement could lead to consolidated supply chains
while removal of tax at manufacturing point would mean radical changes in distribution of goods
and concomitant reduction in costs of doing business seamlessly across states. Removal of the
concept of excise duty on manufacturing may improve cash flow and inventory costs as GST
would now be paid at the time of sale/supply rather than at the time or removal of goods from the
factory. Interest on working capital would therefore decline. In principle, GST is therefore a
laudable reform.
On the flip side, a substantial percentage of the gross indirect taxes collection of Rs. 14.89 lakh
crore (Centre + States) in 2014-15, Rs. 3.32 lakh crore, on account of tax/duty on electricity,
POL and alcohol for human consumption (that accounts for the vast majority of state excise
collections) are presently excluded from the ambit of the GST Act. In effect about 18-20% of all
indirect taxes will be excluded while computing the basic GST rate. Any hike in these
duties/taxes subsequently will therefore add to the basic GST rate. There is no agreement on the
basic GST rate with ranges of 15-24% being suggested by the Union and States. The higher the
basic GST rate greater the propensity to evade GST and counter-productive recourse to
generation of black money. Conversely, a lower GST rate would incentivize mass compliance on
volumetric basis and substantially enhance revenues for governments.
The GST Council would decide on all future hikes in the basic GST rate and decide on the
quantum to be transferred to states. The Centre would have 33% of votes while the balance will
be exercised by the States as members. If this Council’s decisions are made on simple majority
basis, and the ruling party at the Centre with its same-party states cross the 15+1vote mark (29
states and the Union), this could place states ruled by opposition parties at a distinct
disadvantage.
The destination-based GST may work to the disadvantage of major manufacturing states like
Tamil Nadu that derived their revenue at the point of manufacture. Now that the GST will be
collected at the final point of consumption, populous and often averagely administered states like
Bihar would generate higher GST revenue and become eligible for larger share of GST revenues
from the Centre. There would be little incentive for states to attract investment, instead promote
consumption that is self-defeating. Likewise, states with relatively low populations, hence lower
consumption and GST share, but located in desert, hilly or remote terrain (such as in NE India)
and attendant higher infrastructure and administration costs may be sufferers. How GST would
tie in with the 14th Finance Commission’s accepted recommendations remains to be seen.
Consumption-based GST on a standard formula may prove deleterious to the needs of states,
particularly in NE India. Their limited GST share may be compounded by virtual nullification of
Centrally-sponsored/aided schemes from 2015-16 and onward, apart from persisting relatively

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high inflation. Their representation on the GST Council is unlikely to help much, particularly if
they are ruled by opposition parties. In the successful passage of the GST Act, states would
indubitably lose their larger share of the flexibility of targeting development funds or flexing
them to attract investment, both of which are state-specific. In sum, the Govt. of India with its
veto power in the GST Council assumes an unassailable position in the finances of a state and,
by logical extension, over its politics – a critical pointer to a fast-emerging centralized polity
under NDA 2.0, enough reason for resistance by states that perceive a ‘raw’ deal in the process
of the state GST Acts. This is probably why neither the US nor the EU, nor Scandinavia – all
federations - adopted GST.
GST is technology driven. While the Govt. of India proposes to train about 60000 personnel to
operate the collection, accounting and transfer of state share systems, GST would require
extensive complimentary training at every level of the procurement-manufacturing-
intermediates-sales chain. In addition, small retailers would have to invest in expensive
electronic hardware and real-time Internet connectivity coupled with hiring trained personnel
that may not be easily available for the first few years. GST would therefore need a reliable high-
speed backbone and reliable distribution networks with cent per cent up time in a nation where
the frequency of dropped mobile calls and erratic data transfer lines is amongst the highest in the
world. Similarly, banks in remote parts of the country would also require trained personnel and
hardware (and problematic maintenance) to receive and account for GST receipts.
There are other related issues. For instance, how would central and state indirect taxation
departments be reorganized and would there be any major savings on HR and administration
costs in an automated environment? How would politicians that have made a living of extortion
at all toll/octroi gates to fund their vaulting political ambition and financing their own private
mercenary goon armies, notably in Assam and many other parts of NE India, sabotage the
implementation of GST? Would a captive broadband network be available for GST and what
costs are involved in government and private businesses? Would any financial assistance be
available from government for small business to invest in GST hardware? Where would business
hire GST-conversant personnel to operate the system and how would they finance such costs?
The key to the success or failure of GST is the basic tax rate and fairness in the distribution of
GST revenue. India has no social security system, hence bears no comparison to high rates of up
to 25% in some developed countries. While limited exemptions are welcome, yet Australia with
a 10% basic GST rate exempts basic foodstuffs, water, sewerage and drainage services, health,
education, religious and related supplies, child care, supplies of going concerns, and
international transport and mail, etc. Likewise, New Zealand with a 15% basic GST rate has
generous social security and health care for its citizens. Then, shouldn’t India’s basic GST rate
be in the range of 10-12% without exemptions?
The drafting of the CGST and SGST Acts will indubitably be a contentious and long-drawn
affair. Likewise, implementation is likely to be a torrid affair with inspired politico-economic
opposition and mounting capital and maintenance costs in a nation with poor infrastructure. Yet
GST, if finally implemented, will be a path-breaking reform, the precursor of equal radical
replacement of India’s wrecked administrative, judicial, education and many other systems that
hark back to colonial times when these ran with far greater success. (1740 words)
The author is a senior public policy analyst and commentator