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BRP Bhaskar: Indian common market is born
July 04, 2017
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Exclusive to The Gulf Today

With the catchy slogan “One Nation, One Tax, One Market”, the Indian government ushered in a new national tax regime at a midnight ceremony last week.

Unlike demonetisation of high-value currency, undertaken eight months ago without adequate preparations, the tax reform was launched after long deliberations.

The new tax regime is essentially a continuation of the reforms initiated by Manmohan Singh as Finance Minister in PV Narasimha Rao’s government a quarter-century ago. It will benefit foreign firms setting up facilities in the country by providing a uniform tax structure regardless of where they are located.

The first step towards introduction of a national goods and services tax (GST) scheme was taken by Prime Minister AB Vajpayee in 2000 when he set up a panel to design a suitable model. Strong opposition from state governments, which feared loss of revenue as well as limitations on their taxation powers, made the going tough.

Modi, who, as Chief Minister of Gujarat state, had stood against the Manmohan Singh government’s bid to introduce GST, changed his stand on becoming the Prime Minister and decided to push it as part of his economic reform package. Replying to Opposition taunts about the shift in his position, he said he had some misgivings about the scheme. As a Prime Minister who had been a Chief Minister he could address the states’ concerns on the issue, he added.

In 2015 the Modi government set April 1, 2016 for rolling out GST. The Constitution needed to be amended to introduce it. The ruling coalition could easily get the amending bill through the Lok Sabha, where it has a majority. It was not until August 2016 that it could enlist the support of the Congress which was necessary to push the bill through the Rajya Sabha.

The Centre still had to conduct tricky negotiations with the states to work out details of the new tax regime. It is entitled to credit for completing the process speedily and making GST a reality by July 1.

Conceived as a multi-stage, destination-based tax, GST is levied on every value addition. The final consumer, it is claimed, will bear only the GST charged by the last dealer in the supply chain.

Does that mean the consumer will pay less for goods and services? Or will he end up paying more? There is no simple, straight answer to the question.

Contradictory trends are already in evidence. Some items now cost more and some others less. The biggest automobile producer announced a three per cent cut in the prices of some models, supposedly to pass on GST benefits to the customers, but hiked the prices of some other models by Rs 100,000.

With an estimated population of 1.34 billion, India constitutes a big market. As the national economy is growing rapidly, the market bids fair to be even bigger. But the “one nation, one tax” bit is not quite true.

There are actually three GSTs – a Central GST, a State GST and an Integrated GST – levied by the Centre on inter-state supply of goods and services. Also, there is wide variation in the tax rates.

There is no levy on several items and bullion attracts a low three per cent tax. Four slabs, of five per cent, 12 per cent, 18 per cent and 28 per cent, have been fixed for other goods and services. There is also a cess to raise money to compensate the states for revenue loss.

No other country with a GST regime has so complex a tax structure and such high rates as India has opted for. The rate is six per cent in Malaysia, seven per cent in Singapore, seven and a half per cent in the US, 15 per cent in New Zealand, 17 per cent in China and 19 per cent in Germany. Brazil has two rates: seven per cent and 12 per cent.

Economic analysts have said that the GST scheme is full of imperfections. One of them is the compromise with the states which has resulted in the exclusion of petroleum products, liquor and real estate development from GST.

The coming weeks will show if the preparations made for the switch to the new tax regime were adequate or will bring needless suffering to the people, as happened with the demonetisation programme. It did not yield the anticipated benefits but caused immense hardship to the people, especially the poor.

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 The author is a political analyst of reckoning

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