The Big Picture – No GST bill in Winter Session: what holds it back?
It is now fairly certain that the April 1st rollout of the grand indirect tax reform GST is not happening. The plan seems like that it is put on hold till September 2017 when the time given by the Constitutional Amendment will automatically expire for the GST rollout meaning that the new regime will have to kick in by then.
There are two clear reasons why the GST is not happening as planned:
There is no consensus on the contentious issue of dual taxation between the Centre and the State Governments. States like Tamil Nadu and Kerala are hellbent on the demand that the control over companies with turnover of less than 1.5 Crore Rupees should rest with them. Centre meanwhile is not too comfortable with the idea of giving to much too the states.
There is also a political issue in place after
There are issues of safeguarding the interests of taxpayers as well. There is a need to make sure that taxpayers have to pay one tax and not two. To persuade more people to pay taxes, it is required that the taxation system is made simple and not complex. The way compliance structure for GST is being framed, there will be increase in the cost of compliance significantly by asking the taxpayers to upload transaction details of sales and purchase especially in manufacturing sector.
The real problem of revenue sharing will be because of demonetization. From GST perspective, demonetization was very poorly timed. Ever since demonetization came, the pinch has been felt in the states much more. A number of states have gone against the Centre because the sources of revenue for states are a little limited as they have indirect taxes as the major source of income. Property tax goes to the local governments.
Industries and reporting systems for the complexity of maintaining records which is required are not ready yet therefore, it is good to have some time to put things in order. It would be a blessing in disguise post demonetization. The way GST came initially, it was not serving the purposes for which it was to be incorporated that is unifying India into one market but it was to be done with a single unified rate not the kind of rates which have been brought in now and discretionary cesses.
GST is a team game. Cooperative federalism has to be there while demonetization is an individual sport so they do not gel together. It has to be noted at the same time that the more the delay, the more the things proposed will get diluted. Typically, in an economic slowdown, the evasion of indirect taxes goes up because businesses, trade and everybody is under pressure. Following demonetization, more black money is being generated rather than being curbed. So delaying GST might again boost parallel economy again and it also take more time from the people to accept formalized payment systems.
Direct taxes are more progressive in nature whereas indirect taxes are regressive. All economies as they move forward, increase the share of their direct taxes. Now with GST the social as well as economic efficiency which was to be gained was by keeping the rates low, very few exemptions and higher compliances. To remove the ill effects of demonetization, it is being said that the rates of direct taxes should be lowered. This would increase the burden on indirect taxes and make it far more regressive. Now there is time for the Government to look at direct taxes along with indirect taxes and then see the way forward.