GST Diaries - Part 1

The Goods and Service Tax is widely expected to lessen the overall burden of indirect taxes on the ultimate consumer. In public finance jargon, GST is expected to reduce the regressiveness of the existing indirect tax system and uphold the principle of equity in taxation. The advocates of GST argue that the GST levy will seamlessly transfer the Input Tax Credit through the Supply Chain and consequently reduce the effective impact of the tax. However, all this talk on seamless transfer and progressivity of taxes come while there is absolutely no consensus on the rate of levy.

There are several issues lying loose in the discourse on rates. There is a certain degree of ambiguity as to what kind of rate differentiation will GST adopt. Will the State and Central levy be uniform? Will there be a serious of rates for different goods? Will there be a rate differentiation between goods and services?

The following illustrate the consequences of the several propositions being made on rates.

(i) Different Rates for Services and Goods: In case of a works contract, the existing indirect tax regime values the consideration paid towards the service of works contract as the Gross Amount received by the service provider minus the value of the goods in property transferred by the service provider to the service receiver. This rule is introduced to help an assessee to clearly identify the value of service (and pay service tax on that value) as against the value of property transfer made while rendering the service. However, the degree of clarity achieved in the valuation of works contract has not been achieved with respect to other services like catering contracts, business auxiliary services etc. This led to several litigations and consequent administrative hassles. Now, by continuing a differentiated rate system, between services and goods, in the GST regime, one may end facing similar litigations and administrative hassles in the proposed regime.

(ii) Different Rates for Different Goods: By charging multiple tax rates, the GST regime may fall prey to the same problems that the erstwhile sales taxes faced. Some state governments, in order to uphold the principle of ‘equity’, have, at one point of time, courted as many as 10 different rates. I sincerely wish that the policy makers will take note of the fallouts from multiple rate structure and make GST a single or, maximum, a dual rate levy.

(iii) Effective Rate: The effective rate of indirect taxes in India (ignoring Customs and CST) is 12.56% (CENVAT + VAT). There are reports in the media which suggest that the finance ministry and the empowered committee is looking at a rate of around 16% (8%+8%). This steep levy, in spite of all the efficiency gains from administrative smoothening and seamless Input Tax Credit transfer, will dampen the growth of businesses.

There are several pressing issues confronting GST implementation, and that on Rate, mind me, have got far reaching consequences.

Public Accounting Gimmicks

It is common knowledge that accountancy is one of the most creative art forms that man had stumbled on. And, it becomes all the more artistic when you are dealing with someone else’s money. Now imagine what will be the case when a bunch of underpaid bureaucrats account for ‘social expenditure’ made by dishonest public representatives from the tax payer’s money. Indeed one will be bound to witness the ingenuity of human intellect and imagination displayed through a cleverly camouflaged maze of numbers. This is the primer that guides most of our public accounting processes.

In my current study I am attempting to understand the trends of Social Service expenditure made by certain states in India. To my amazement, I was able to make some headway in obtaining relevant accounts to study the patterns. However, the quagmire does not lie in the access to public documents (as in case of many superfluously ‘open-economies’ that I have had an opportunity to live in) but in what comes next – i.e. cracking them.

The beauty of public accounting is that you don’t know what you are accounting (public good or private good)? , why you are accounting (to record or to report)? , for whom are you accounting (for public or public officials)? , and for heaven’s sake, who is actually accounting?. This ambiguity inspires even the rather docile of public accountants to prove their mettle.

While I was trying to identify expenditure made by some state governments on Social Services, I was happy to locate a complete segment on the social services in the state expenditure statements. It has a very professional touch to it. Thanks to the efforts of RBI, I was also able to trace a uniform/standard expenditure statement published for different state governments. Now, one may wonder what I am complaining about. Let me give you a quick example which elucidates and highlights my plight.

The Government of Tamil Nadu rode to power on the promise of free color televisions for families living below the poverty line. Quite steadfastly, the government kept its promise of delivering the televisions (albeit the quality of the delivery is can be questionable). However, the real catch to this expenditure came when it was to be accounted. Thanks to the doctrines of public finance, there are some underlying principles which direct public expenditure accounting practice to describe the impact of ‘public expenditure’ on social wellbeing in a comprehensible manner. However, the principles are only persuasive or directive and not affirmative or confirmative. Hence this allows the government accountants and their political mentors have a field day. Encouraged by this haziness in the interpretation of the principles of public accounting, the Government of Tamil Nadu argued that the expenditure on Color TVs (which is essentially a consumption expenditure if not an economic decoy in the election manifesto) as a ‘Social Investment Expenditure’. It persuaded the C&AG to agree to this classification by further enlightening that the expenditure made on color televisions will contribute towards improving the access to public welfare information of BPL families. I wonder what the serials and cinema addicted beneficiaries of the scheme have to say. So what am I to believe and use for my study? This politically inspired idiosyncratic definition of social investment, offered by a state government, ruins the very composition of my study database. And to remain ‘academic’ enough and test my study empirically I have no other option but to disregard my faculties and believe the published reports. Well this is only one of the excesses caused by an inept public accounting system, which I may reasonably believe are beyond my comprehension.

I believe that the problem of public accounting is more applied than conceptual. One needs binding principles and not loose-ended ones to compel unscrupulous public officials to classify disbursements from the public coffers in a meaningful way. Moreover, a public sponsored body which prescribes and administers standards in public accounting (as in case of India) is an agency nightmare. It is high time that the government reinvents its public accounting system by actively collaborating with professional bodies. This will prove fruitful not only to the minuscule academia but also to the vast majority who are clueless as to how exactly their hard-earned tax money in being churned around for their own welfare.

Arise, Awake and Stop Not till the Goal is Reached

Many of us, young people, today, live in cities and towns. We live in crowded settlements, but seldom interact with our neighbors. We commute many kilometers everyday to reach schools, universities and work, but we rarely care to visit our neighborhood outreach centre. We have big ambitions but we remain cocooned in myopic visions. We have immense potential but no initiative. Many, young city dwellers, in the developing world, have been brought up in the bustle of city life without access to good education, health, civic amenities and quality of environment. We remain unperturbed by the bedlam surrounding us and are complacent to the inefficiency of our systems. Do we plan to bequeath the chaos, which plagues our lives, to our children and their children? No! We have an important responsibility and a great opportunity to effect enormous change to the defunct systems we live in.

There are very many factors which may undermine our participation in urban development. These include heavy politicization of local bodies, lack of organized non-political youth associations, economic difficulties, poor parental patronage and inept education system. However, our ability to face all odds comes from within. Our strengths lie in our dynamism, unwavering will and above all our potent age.

It is high time, for us, to put forward a legitimate claim, a claim for a better future. We have a fairer advantage in technology than our predecessors, and we must pledge to make use of it to effect the right change. I wish to put forward a few proposals to help young people actively participate in building sustainable and livable urban dwellings. I will make a modest attempt to prove that that money is not the only solution for development.

I believe that the primary agenda of urban development should be creation of a healthy education system. Healthy education implants thought and inspires action. To begin with, I propose that a course on ‘Urban Awareness’ should be introduced as a core subject in all Universities, Colleges and Schools. This course should facilitate a hands-on learning process wherein young stakeholders will discuss and debate on all existing systems and proposed plans. This course can encourage young students to come up with fresh and practical solutions to the idiosyncratic problems they face in their localities. This enterprise will go a long way in developing a sense of responsibility from a young age.

Also, young university students can take charge to introduce classes on ‘sustainable living’ in underdeveloped neighborhoods. The students can target to teach women living in these areas. By educating mothers and grandmothers we were able to motivate their children, brothers, husbands and extended families. I believe, in this process, the college students will have a first hand experience of a responsible and healthy education.

Exploding vehicular traffic and consequent environment pollution are chronic problems affecting many cities in the developing world. An important cause for this is an inefficient public transport system. This again can be attributed to the red tape. However, student and young people can effectively help correct this problem. Students can assist the understaffed civic bodies to survey major routes having highest vehicular density, collect feedback from different segments of the society and research on alternatives in public transportation. The universities and colleges can award project credits to students who participate in such initiatives. I am aware of a research team which voluntarily advised the Chennai Metropolitan Transportation Corporation on ways to optimize fuel consumption and improve bus frequency. Monies saved from this economization can be employed to upgrade the services.

In order to improve vehicular traffic management, the civic authorities can partner with a team of students and operators of photocopy shops, public telephone centers, internet cafés, tea stalls etc (who are mostly young people) in building a mobile phone based traffic management network. These young people working/living in vantage points can feed a central database (by text messaging) on traffic conditions. The central database can in turn transmit the information through FM channels, Traffic Police Cops and Road Signs to the commuters on road. This could effectively curb the traffic snarls that have now unfortunately become an integral part of urban life.

The progress of several public projects is hampered by bureaucratic quagmire. In order to prevent this, young people can volunteer to offer independent project vigilance. At this juncture, I would like to recall how a group of young cricket enthusiasts have voluntarily organized themselves to oversee the progress of a small community sports complex project. This made contractors, involved in the construction, answerable not only to the municipal authorities, but also to the ultimate beneficiaries. The outcome of this initiative is that the complex has been built within an unprecedented time of eight months and now efficiently offers services to more than 2300 members. This team which oversaw the project in its construction stage has now shouldered the responsibility to monitor its maintenance and upkeep.

If we don’t budge now, we have a crisis waiting to happen soon. It is estimated that more than a billion join the world’s urban population in the next fifteen years. Are our current cities and towns capable of sustaining that? Let us pledge to change this fate and transform our cities and towns to incubate the minds of today and inspire the minds of tomorrow.

I wish to conclude citing a famous message of Swami Vivekananda “Arise, Awake and Stop Not till the Goal is reached”.

I Failed My Driving License Test !

After a long time of contemplation, I finally decided to get a car driving license. For the last eight months (since I started driving) I was complacently comfortable with my provisional license. Succumbing to incessant warnings and cautions by people around, I applied for the test, traveled 40 kilometers from my hometown to reach the track test, spent two whole days waiting for the 'break inspector' and finally returned back empty handed. In spite of an unhappy ending, this episode gave me an interesting insight.

I wrote an amateur academic paper on corruption exactly one year ago. I submitted this for a national level essay competition, won it, and traveled to the United States for free. In that essay I took a very 'objective' stance and denounced passionate idealism that many people offer as solution to corruption . I argued 'Corruption is Social Deviance which has got no idiosyncratic solutions. Only structural or systemic reforms are required to mitigate the costs levied by corruption on social well being'. When I take a quick re-look at this sentence, I find it fancy and wordy. I wonder how the judges chose me to make a trip to the US. However, in crux, I still believe, sporadic anger and frustration led solutions to corruption are impractical.

Coming back to the driving license test, I cleared all formalities and produced all relevant documents. I did a good job on the test track and then approached the 'break inspector' for his decision on the outcome of my test. (FYI, Driving Test results are highly discretionary and are not subject to appeal under any circumstance). He expectantly stared at me for a couple of moments and, after grasping my unmasked persistence, failed me (of course, also, he didn't find the identification mark of a 'broker' or 'agent' who collects and passes on the emoluments to him). I was, for an instance, flabbergasted, not because of my the two day wait crashing into a failure, but because of his stoic response to a genuine 'ungreased' application.

I got 'Indian (Bharateeyudu)' movie inspired spurts to assassinate the license officer on the spot. (Not that I have the guts to actually do something like that).

After some inadvertent cold stares I was given an option to pay my way out (not a very steep sum). Given my 'objective' outlook on corruption, I should have 'objectively' bribed my way out. But I categorically refused. I didn't have control on my mind's processing and consequently my body's actions. However, I am still of the academic conviction that 'corruption' in many cases is a systemic failure and not an individual feature. I know I cant get my license unless I have a high profile recommendation/pay a few hundred bucks/reinvent the system. I, currently, find the first two closer to my capacity but I refuse to employ them !

Many a times there is a distance between your objective beliefs and subjective actions. I think this distance is heteroscedastically distributed at different instances. I only wish I develop a metaphysical power to reduce this gap. Until then, probably I will not hold a Driving License :).

What Aches GST ?

The Goods and Services Tax implementation is an ambitious reform exercise. The envisaged GST regime completely reinvents the exisiting Indirect Taxes system into a more comprehensive, and, hopefully, efficient avatar. Before attempting to understand the proposed GST structure, let us take a brief look at the exisiting indirect taxes architecture.

Indirect Taxes, in India, are levied at three levels; centre, state and local bodies.

Central Government levies taxes on:

1. Manufacture of goods in form of Excise Duty or CENVAT,

2. Rendering of Service in form of Service Tax

3. Import/Export of goods in form of Basic Customs Duties, Countervailing Duties and other allied duties under the Customs law

4. Interstate sale of goods in form of Central Sales Tax

State Government Levies Tax on:

1. Intra-state sale of goods in form of VAT (Value Added Tax)

2. Entry of goods in form of Entry Tax

3. Entertainment/Luxury goods in form Entertainment or Luxury Tax

4. Sale of Property in form of Stamp Duty

5. Excise duty on Alcoholic Liquor

6. Vehicles in form of Motor Vehicle Taxes

Local Bodies Collect Taxes on:

1. Entry of goods in form of Octroi duties

2. Properties in their respective jurisdiction in form of Property Taxes

3. Usage of Water in form of Water Tax

There are underlining restrictions in the Indian Constitution on the powers of Union/State/Local Governments in levying taxes. The constitution prohibits central government from levying excise duty on electricity, alcoholic liquor, and narcotics. It further prevents the central government from taxing intra-state sale of goods. Constitution restricts the state government from levying excise duties on manufacture (except on alcoholic liquor), duties on import/export of goods/services into/from India, taxes on services rendered in India. Hence, there are many allegations on the vertical imbalance in the centre-state devolution of revenue powers in India. The exisiting system is ridden with several inefficiencies like cascading effect (tax on tax) of Excise/Customs duties, low base, poor compliance, unhealthy tax competition between states etc. Another important feature of this system is that the jursidictions of state and central government are ineptly designed.

The proposed GST attempts to plug some of the loopholes existing in the current system and improve the over all efficiency of India's indirect tax system. GST proposes to bring about a uniform dual levy regime across India. It basically attempts to intergrate indirect taxes at all levels and effectively reduce the cascading effect of taxes on the consumer. GST, as the task force report indicates, is not necessarily regressive as the benefits drawn from this exercise will actually reduce the effective tax on various goods and services.

However, a comprehensive Goods and Services Tax will also imply that both central and state governments will have concurrent jurisdiction to levy taxes right from manufacture/import/rendering of the service till the final consumption at retail level. This scale of an Indirect Tax regime overhaul would require constitutional amendments, passage of legislations in the parliament and all state legislatures. Beyond the legal and legislative aspects of passing the GST enactment there are many issues, in this deal, waiting to be resolved. First of them will be fixing the revenue neutral rate (RNR), i.e. the rate of GST levy at centre/state level which will be neutral to the revenue being generated in the existing system at current compliance levels. The other herculean tasks ahead of the empowered committee (given the idiosyncracies of its members) include agreeing on compensation for revenue losses by state governments in the initial years, fixing uniform/semi-uniform exemption thresholds for small players, subsumation of different state level and local body level taxes into the GST net, deciding on uniform concessions/exemptions to priority industries/products etc.

The GST implementation indeed has got multiple aches, thankfully, not all of them are political. The empowered committee of finance ministers has indeed got an ardous challenge ahead of them, however, let us hope, for our own good, that the GST should be a implemented at the earliest.

No Roll Back Please !

The government has bitten the bitter pill by making a politically unpopular decision of increasing the basic customs duty on crude petroleum by 5 % and hiking the excise duty on petrol and diesel by Rs1/Litre. This triggered an immediate backlash not only from the opposition (who for the first time in India’s parliamentary history staged a walkout midway of a budget session) but also from its coalition partners like Trinamool Congress and DMK who have state elections to face next year. Mr Mukherjee needs commendation for standing firm on his proposal and not relenting to the mounting political pressure to roll back the petroleum price hike.

Critics of this proposal cite that the cascading effect of this petroleum price hike will be felt in many quarters of the economy including agriculture. Now let us objectively understand the dynamics.

Firstly, the finance minister proposes to accommodate petroleum subsidies into the budget and not muffle the same as an off-budget guarantee like his predecessors. This is a welcome measure which would significantly improve the accountability of these politically sensitive subsidies. However, accommodation of such subsidies into the budget would imply cash payments to downstream oil companies. Where can the government accommodate this cash payment? Especially at a juncture where fiscal consolidation is a must, the government cannot afford to finance this payment through borrowings. If in case, this money is raised through market borrowings, it will definitely drive out a segment of private investment and inflate the general interest rates which will again affect the public at large.

Now by proposing to finance the cash subsidy through a hike in customs and excise levy, the government is attempting to fund petroleum subsidies by not disturbing the cost of private investment. Moreover, this is the best time to tax petroleum products and retain the surplus (if any) to cushion any volatile upswings. Mr Mukherjee can also consider utilizing the money earned from these levies for incentivizing research in renewable energy sources.