The buck starts here, and it is not a tough-sell this time around. The Goods and Services Tax (GST), with its significant and allegedly incendiary means to increase state tax revenues is taking hold, while old paradigms of administration will need to be reworked or removed for the better.
GST's topline looks promising at the very start and the volleys of criticism have been largely muted in comparison with the demonetisation fiasco. This is partly because the government, even after accounting for a myriad tax breaks, appears to have trained its sights on lowering citizen tax rates by broadening the indirect tax base, which GST experts agree, would make the system more efficient and boost economic growth.
Among the interesting changes visible on the ground is the number of registered taxpayers coming under the GST shadow set to exceed those in the previous indirect VAT regime. New registrations crossed the 1 million mark on July 29, while around 7.95 million applicants had sought GST registration at the outset. The latter notably comprised at least 80 percent of the total assessee base of state value-added tax (VAT), service tax and central excise duty.
Some estimates even forecast a 20-25 percent post-GST increase in indirect tax collections, which augurs well for a country with one of the lowest tax compliance rates as a percentage of GDP. Higher tax compliance and widening of the tax base are implicit. The estimates, albeit on paper at the moment, give rise to hope that the government will get more money to spend on social welfare and providing additional infrastructure to its citizens.
The good ol' bad habits
The broadbased structure of GST does leave VSEs (Very Small Enterprises) out of the purview of the GST supply chain equation and this deserves extra attention going ahead. SMEs entering the tax net as a whole will need to obtain more ease of doing business when the government has expressed interest in developing small scale entrepreneurship actively. For now, even modest loan advances are an arduous trudge for SMEs seeking to expand, and the GST authorities should chalk out tax-friendly loan packages for SMEs seeking land and other incentives for further augmenting their business blueprints.
One way for the government to make GST friendlier for those at the base of the SME pyramid is to sequence the policy in a manner free of documentation hurdles and user-friendly for businesses without access to broadband Internet. The ombudsman method could work wonders for the GST ecosystem and help new entrants into the tax net to be at ease when it comes to filing monthly transaction disclosures.
The most headline-friendly aspect of GST – depopulation of the state borders by slashing the number of 'check-posts' or checkpoints – is also the most visible result of the landmark tax reform at the moment.
Lesser checkpoints make for greater efficiency in controlling logistics costs, lesser time spent at the checkposts and lesser corruption; though, at the level of day-to-day operations, it will be the proper administration of these interstate checkpoints and corruption-free tax collection which will determine the long-term success of this mini revolution.
Scroll down for video
States will need to be supervised closely by the Centre in breaking the nexus between big logistics companies, urban local bodies and the entrenched border bureaucracy with its corrupt transport officers. These realities can undermine the principle of "voluntary pooling of sovereignty in the name of co-operative federalism", -- in the words of Chief Economic Advisor Arvind Subramanian -- underpinning the GST regime.
Care should be taken to identify and come down harshly on busybodies who charge 'octroi' and 'entry tax' at interstate borders, as media reports have suggested. These are words which belong in a dictionary of history, and are not part of the GST lexicon.
For a working taxocracy
Rampant bureaucratic and local body collusion with the logistics companies and criminal agencies to help evade taxes does not augur well for GST -- if certain state government machineries and local bodies are chronically and inextricably linked to this collusion.
As many as 22 states have removed these barriers already leading to significant savings in time and expenditure. This should ideally be offset in the form of lower end prices of goods and services and new entrepreneurial avenues with their resultant job opportunities. Besides, it will have strong spinoffs by way of widening the direct tax base, as much as newer industrial units coming into the tax net.
The states will have to work on developing a workable parity, and wherever feasible, uniform tax rates on different goods. Butting in with state levies in cases where a consensus between two states is elusive would only negate the GST benefits of a uniform indirect tax rate for a particular good. This will be crucial to ensuring that queues at interstate borders do not grow longer as in the pre-GST era.
The tax net has unarguably been widened, and the prospects of higher indirect tax collections will pep the government up in the medium to long term as it goes into the next elections. But the GST regime must be on its toes to address existing loopholes and new problems which will arise like negative impacts on new business ventures, capital expenditure and jobs being copped out in labour-intensive industries like footwear, leather and textiles.
The informal sector has been a most laggardly of entrants trooping onto the GST platform -- going by negative feedback from smaller suppliers and manufacturers of goods and services. Incentivising them to contribute their mite will be an obligation for the GST mandarins whose end-game should be to motivate GST compliance, not scare people away from participating in a more formalised economy.
For a start, the government must simplify compliance requirements and reduce registration costs for small businesses. Timely clarity on various aspects of GST from a single-point source is imperative to address various issues and confusion prevailing at every end-point of GST.
Black elephants and albinos
Making registration thresholds easier to cross would not be a challenge for the bigger corporates. Incentives given to various industries beyond the purview of GST should be reviewed against the relevant time windows and the more moribund ones should face the axe. This would be necessary for the GST to achieve its primary goal of viable tax collection.
At the macro level, the disinvestment program for underperforming or non-performing public sector units (PSUs) will need positive political will to counterpoint the inclusivist spirit of GST.
The government must work at getting the PSU unions on board when it comes to implementing VRS schemes, which have achieved limited success at this point. For instance, VRS programs floated for a PSU white elephant like the Hindustan Photo Films Manufacturing Company, have found takers among a measly 25 percent of its workforce. A company which focussed on making film for cameras years after the digital era had taken over, is still unable to bring its factory floor on board when it comes to convincing them that a no-show must not go on.
The remnants of heavily mismanaged PSUs like Hindustan Photo Films litter the government's barren corporate account books. Its attempts to find takers for them from among the competition or by rightsizing their workforces appear to be more a test of political brinkmanship than management astuteness.
Another area where revenue leakages must be plugged as GST develops further: the question of continuing with unviable incentives for industries in sectors like technology and agro-business and every unremunerative sop crafted with a strong SEZ bias will need a thorough impact study; and, done away with if not viable from the taxpayer point of view. Otherwise, the gains of GST may not help reduce the fiscal deficit, but actually serve to increase it.