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Book Review: A Case For And Against GST

Arun Kumar’s book Ground Scorching Tax is a well-articulated treatise on the GST where all concepts are explained in a rudimentary manner

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GST has generally been acknowledged as being an ideal tax system, which has been implemented in a large number of countries and brought several benefits. India, too, embarked on this tax system post demonetisation, which raised the emotive cord as one major constituency -- the SMEs -- was impacted by this new tax regime. The government has been fine tuning the system regularly both in terms of changing the tax rates on various goods and services and also making it easier for the SMEs.

However, when one reads Arun Kumar’s book on the subject, the impression derived is that the GST is an incorrect concept for a complex country. The argument that GST is there everywhere in the world cannot be a justification because countries have adapted this concept to their underlying conditions, which the author feels has not been done in India. While Kumar, an erudite scholar and economist, has written earlier extensively on black money and demonetisation where he convincingly argues that the government was off track, the same cannot be said in this context. Some of his conclusions may be perceived as premature as the system is still evolving, and this has been accepted by the government.

Let us see how he puts forward the case against the GST. The reader will agree with the author that to begin with, we cannot have an efficient tax system, which lowers prices and also increases revenue for the government while addressing black money simultaneously and delivering a high score on doing business. Above all, GDP growth will be higher by 1-2 per cent. In fact, based on the data collected till now, it does look like that after a series of changes in the tax rates, revenue collections have come down. The story on prices is equivocal as it is a mixed result. And most certainly GDP growth shows no sign of being affected though it may be too early to expect it.

The advantage that forward looking economists have when they come to such conclusions is that they can get theoretical without giving timelines. Often it will be close to impossible to separate the incremental growth in an economy due to GST and other direct factors.

Kumar also argues that having multiple rates, which change regularly has created havoc in the system. This is where he talks of the GST not being appropriate in our complex structure. But in defence of the government, it can be said that this was acknowledged upfront when the GST was introduced with the rider that the system would be evolving and such changes would be made to ensure that we get the right fit over a period of time. Otherwise it would be close to impossible to set in motion any new tax system in an economy where as much as 40-50 per cent of the GDP resides in the informal sector.

The author hits the bulls eye when it comes to bringing to fore the plight of the unorganised sector. Kumar writes that the case of GST enhancing efficiency and easing the ‘doing business’ environment is only for big business and comes at the expense of the unorganised sector which gets marginalised in the process. While this argument is true to an extent, the effort is definitely on from the government’s side to assuage this sector with the frequent changes in the structure.

The author has also made a pertinent point on fiscal federalism being impaired by the GST. States have been given constitutional power to levy certain taxes, which has now been changed and this actually puts them in a bind when it comes to enhancing income by raising tax rates as these GST rates are now institutionalised. States surely will find it challenging to raise revenue on goods and services as these rates have been set in the Centre.

Kumar raises the issue of exclusion of certain goods like petrol products, liquor and tobacco. It is true that these have been consciously left out as they bring substantial revenue for the states. But discussion is on to look seriously at petroleum products. Therefore while the author looks at this being ‘opportunistic’, it can be counter argued that we are presently in stage one of the phased rollout of the GST.

Does he provide an alternative? Towards the end, he does offer his suggestion, which is debatable. For instance, first, Kumar believes direct taxes are better than indirect as they fundamentally tax the rich more which is the right way. Here it can be said that direct taxes contribute substantially to overall tax revenue (over 80 per cent). Second, he feels that we should get rid of the input tax credit system and only tax goods and services at the consumption stage. Hence steel will not have a tax rate but only cars and utensils will be taxed. While this sounds good, it will have challenges of mapping every product with the end product and lead to a different set of complexities. Similarly services that are productive should not be taxed like chartered accountants, lawyers, finance but others like tourism and hotels should.

GST, hence, according to the author has several unfulfilled promises, ‘marginalises the marginal’ and does not formalise the economy. Ground Scorching Tax is a well-articulated treatise on the GST where all concepts are explained in a rudimentary manner. While the arguments put forward appear to be one-sided at times, they are well presented. That’s what makes this book a compelling read.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Madan Sabnavis

Sabnavis is chief economist, CARE Ratinigs and author, more recently of Economics of India: How to Fool all People for all Times

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