GST #2: How has it Fared?

This blog goes into the details of implementing GST. One of the major problems is the “inverted duty structure”. Pranay Kotasthane explains the problem well with an example:

“Inadvertently, this resulted in some raw materials being taxed at a much higher rate than the final product. For example, the tax on rubber used in hawai chappals is a mighty 18 per cent... On the chappals itself, the tax rate is just 5 per cent presumably because we have to save this laghu udyog. This situation is what’s called an inverted duty structure.”

 

Why is this a problem? Kotasthane expands:

“Assume the hawai chappals are sold at ₹120 to customers. The output tax payable would be ₹6/chappal (5 per cent of 120). However, since the GST is a value-added tax, the chappal maker can net out the taxes she has paid for the inputs. Assuming that she purchased rubber of ₹50, she has already paid a tax amount worth ₹9 to her supplier (18 per cent of 50). The net tax to be paid by her is -₹3! This means the government needs to refund this amount to the chappal maker.”

 

Now you see the complications. Some companies end up being owed tax refund by the government. That adds to paperwork – for companies to file, for governments to process and reimburse.

 

In addition, the possibility of tax refunds has inevitably created a market for a “new class of cheaters: professional refund creators”. Examples include “fake manufacturers of ‘hawai chappals’, across states, other intermediary firms and fake retailers to claim and encash fake credit”.

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Another mess with GST is the categorization of items. Since different categories have different tax rates, this isn’t a philosophical discussion, it’s about money. Raghu S Jaitley had a tongue in cheek list of such categorization in the GST era:

“I have learnt the difference between barfi and chocolate barfi – one is a sweet, the other a chocolate; what’s the essence of falooda – it is icecream, everything else is incidental; is paratha different from parotta – yes, big time; is 100% wheat paratha different from roti and khakra – of course, it is; are basundi and badam milk sweets or are they beverages – they are beverages; is a biscuit with chocolate coating a biscuit; is a chocolate with wafer coating a chocolate – well, the jury is still out on this one.”

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Jokes aside, as Raghu S Jaitely wrote in a different post:

“(GST) took over fifteen years, numerous councils and empowered committees and political wrangling before it was unanimously passed in both houses. As a policy change, things don’t get bigger.”

 

First, it has worked well. Overall. Considering the difficulties of rolling out any country wide changes. Such attempts have fared worse in other countries:

“Remember there have been multiple instances of such implementation failing and being rolled back in other countries with far lower challenges than India. We now have a foundation that is fairly robust and there’s no turning back on this.”

 

Second, for pan India companies, life has become easier. The systemic glitches have been improved progressively.

Third, a VAT regime incentivizes for everyone in the chain to keep records of tax already paid by others in the chain. This has increased the tax base. But weirdly:

“The benefits of efficiency or a wider base haven’t materialised.”

Going deeper into why/how the tax base increased and yet tax collection didn’t may throw up insights and improvements to the system. But in politics and in a polarized world, it is very hard to acknowledge something didn’t work well – the other side is always hovering and drooling. Original claims that tax collection would increase by 14% make it almost impossible to admit what the reality is.

 

Fourth, the COVID-19 pandemic muddied the waters, even if one sought the truth on the above question. How much of tax collection decline was rooted in the pandemic and how much in GST itself? If it’s hard to know the truth, all you get is a polarized debate. Lot of sound and fury, but very little light.

 

All of which is why Jaitley feels that:

“(GST is probably a case of) good intentions but patchy implementation.”