Unraveling Threat of GST

yashwant sinha

Former finance minister and BJP veteran Yashwant Sinha says that there is a threat of indiscipline and disentanglement of the Goods and Services Tax (GST) if states follow the example of Tamil Nadu levying additional taxes over the agreed rate in a particular sector. He also feels that the new law is not a perfect GST as it is fraught with multiplicity of rates and full of compromises.

Meghna Mittal and VS Chandrasekar talks to former Finance Minister Yashwant Sinha on the sidelines of a program in New Delhi. Edited excerpts:

GST has been rolled out but Tamil Nadu has levied an additional 30 percent entertainment tax along with the 28 percent GST rate. What is your view on the GST?

Tamil Nadu’s additional entertainment tax is baffling. Any additional levy by states, right in the beginning, was eminently avoidable. There is not only a threat of indiscipline. If the states go their own way and no not abide by one discipline, the whole thing will unravel, and then what’s the point of GST.

Such matters should be brought to the notice of the GST Council, which should discuss and persuade states not to adopt such things. It is a matter of consensus.

Your views are counter to the various research agencies that have reported the GST would boost Indian economy by around 2 percent?

There was a study by National Council of Applied Economic Research (NCAER), which said GST would add to economic growth by two percentage points. But, which GST? Single rate GST and not a multiple-rate GST. Not this kind of GST.

But, the Indian government is chest thumping citing GST is the biggest tax reform since independence?

The GST, which is being touted as the biggest tax reform since independence by the (Modi) government, is imperfect as the government chose multiplicity of taxes, hence losing out on the aim of simplifying the indirect tax regime.

What is suggestion to the government in regard to the GST?

Is it a perfect GST? No, it is not. It is a result of various compromises as a result of which we have re-introduced multiplicity of rates. We have brought back 6-7 rates. Multiplicity in indirect taxes is the enemy of simplicity. I am feeling disillusioned because of introduction of multiplicity of rates in GST.

Finance Minister has said that multiplicity has been chosen as an instrument to maintain equity between the goods meant for the poor and rich.

A person who uses hawai chappal is probably not paying any income tax. If he pay some taxes at a merit rate (for buying hawai chappal) nobody is going to mind. The fellow who is using the Mercedes car is paying income tax at a very high rate. So this is the basic principle that we should remember that instrument of equality is direct taxes and not indirect taxes.

The point is that indirect taxes is not the instrument of equity in society, direct taxes are. That is why exemptions are given on income tax. All countries have used direct taxes to establish equity and not indirect tax. All countries which have GST have either one or two rates, not multiplicity of rates. It will also lead to litigation and lobbying with all its ill-effects, loss of simplicity.

How does the GST would lead to lobbying?

Somebody who is at 5 percent will try to go to three per cent (tax rate). Tremendous lobbying takes place and then there are classification problems. This product is what and fits into which category and it leads to litigation.

When there are multiple taxes, do you agree with government view on GST as one nation one tax?

The idea of GST was a revenue neutral rate and a simple tax with refund scheme, which is not the outcome. I think we have erred on the side of excessive caution.

And how does Yashwant Sinha — former Finance Minister — feels on Modi government’s claims in regard to the GST being the biggest tax reform?

The GST which has been rolled out covers only indirect taxes out of the three types of taxes — direct, indirect and customs. Moreover, almost 40 percent of revenue stream in indirect taxes is outside the purview of GST currently.

And what about the tax reforms via GST?

Is it the most important reform after independence? Clearly not. It relates to one out of the three taxes. Economic reforms is much wider subject. The kind of attempt that was made in 1991 to introduce budgetary reforms, change industrial policy, taxation, was much bigger than GST is today. Also almost 40 percent of revenue stream is outside GST in terms of alcohol, electricity, petroleum products. We are covering only 60 per cent revenue under GST.