NOTE ON NDA’s FLAWED MODEL OF GST
CM Modi Vs. PM Modi
Shri Narendra Modi, the then Chief Minister of Gujarat, threatened by UPAs reform spree and with the single agenda to criticize all acts of the UPA Government, opposed the GST tooth and nail.
‘The Government of Gujarat in its memorandum submitted to the Standing Committee of Finance had stated that at present threshold under Central Excise is Rs. 1.5 crore. The proposed threshold limit of Rs. 10 lakhs under CGST would bring many of the Micro Small and Medium Enterprises (MSMEs) under the central tax net. This is likely to adversely affect the employment generating units under MSME sector. Some of the units may become financially unviable and lose competitiveness due to additional burden of tax, cost of compliance and dual 27 control. Around 30,000 MSMEs will be affected in Gujarat alone and this contributes to employment of 2.18 lakh families.’
(Source: STANDING COMMITTEE ON FINANCE (2012-13) FIFTEENTH LOK SABHA)
1) Interestingly, no threshold limit was proposed by the UPA as it was left to the wisdom of the GST council which could have only been constituted after the passage of the Constitutional Amendment Bill. However, the Constitutional Amendment Bill was never passed during the UPA tenure.
2) In a complete U-turn from his earlier stand, Shri Modi after assuming the office of the Prime Minister fixed the Threshold Limit to Rs. 20,00,000 and for north eastern states it has been further reduced to Rs. 10,00,000.
Shivraj Chauhan’s Gharwapsi to GST
During the UPA regime, even the Government of Madhya Pradesh, in a note submitted to the Standing Committee, strongly opposed the implementation of the GST and cited illustrations of adverse impact of GST upon consumer prices which has been reproduced as below. The Government of MP said that:
- a) The empirical data relating to the consumer price changes in Australia, Canada and New Zealand is given by (Bolton & Dollery, 2004). On the issue of the effect of GST on consumer price inflation Tom Bolton and Brian Dollery have drawn the following conclusion from the empirical data:
Ø New Zealand‘s GST introduction had roughly 4% to 6% annual consumer price inflation rates.
Ø The GST has contributed substantially to higher inflation and has seriously weakened the Canadian economy in 1991.
Ø Canada has estimated that the GST is responsible for most of the first-quarter 1991 increase in the consumer price index (CPI) of 1.5 percent and has contributed to a decline of 1.2 percent in real GDP (which is equivalent to an annual compound decline of 4.6 percent). The CPI jumped by 2.6 percent from December 1990 to January 1991, with 1.6 percentage points of that rise attributed by Statistics Canada to the GST.
Ø The inflationary pressure generated by this rise in consumption taxation has restricted the ability of the Bank of Canada to soften the impact of the current recession.
NDA GOVERNMENT’S GST MODEL IS EXTREMELY FLAWED!!
Since, the 115th Constitutional Amendment Bill lapsed after the UPA was voted out of power in May, 2014, the NDA revived the process of GST vide the 122nd Constitutional Amendment Bill. The said Bill introduced by the NDA, was enacted in August, 2016. And accordingly, the GST Council was constituted on 15.09.2016 to decide Thresholds, Tax Rates, GST Rules, etc.
- a) Four Tier Tax Structure – ‘most inefficient’
Ø The GST Council under the Chairmanship of Union Finance Minister Shri Arun Jaitley has suggested the most ‘disappointing’ and ‘inefficient’ model of GST with a four tier structure – meaning GST will four tax slabs (5%, 12%, 18% and 28%) which is bound to complicate taxation than to simplify it – one of the main concerns of the draft GST law introduced by the UPA.
Ø Taxation will get more complicated with different tax slabs and it will take away the aim of boosting the GDP by one to two per cent through the present model of GST.
Note: For an uncomplicated taxation system, the Tax slabs under GST should not have been more than two. Many countries, such as Malaysia and Singapore, are operating under a reduced, single taxation system of GST.
- b) NDA GST Model is complex, will lead to rise in litigation
Ø The present goods and services tax is the most complex. The four tax slabs proposed by the Union Finance Minister, Shri Jaitley, will lead to a new regime of disputes between Government on one side and Traders & Consumers on the other side. Companies and individuals will strive hard to dispute over which brackets they fall into or push to keep their valuations lower, whether, legitimately or not.
Ø Expect many more cases on lines with ‘McDonalds Taxation case’ – With a spectrum of Tax Slabs of GST offered by the Modi Government, it is important to recall the famous McDonalds case wherein McDonalds and the Tax Department were into litigation for more than 12 years to ascertain whether the ‘soft serve’ cone offered by McDonalds classify as ice cream or not. Where on one hand McDonalds contended that soft serve contains less than 5% milk fat and cannot be classified as an ice cream, whereas, the Tax Department contended to the contrary.
The Litigation in this matter went on for years in different forums and finally ended in the Hon’ble Supreme Court of India. Now, with Shri Jaitley’s multiple tax slabs under GST, the confusion of classification of Goods and Services is only set to rise.
- c) Registration in Multiple States
The GST model proposed by the BJP requires businesses to register in all the states they are operating in. This will increase the burden of compliances and filing of tax returns, especially on SMSE. Whereas, the original idea behind GST was to make the tax regime simpler for business houses.
- d) Government ill prepared
For any such move, the preparation of the Government should be 100%. Unfortunately, as we saw in de-monetization, the Government here too is so ill prepared that the software is not ready and due to non-understanding of nuances, there is utter confusion.
- e) BJP’s GST Vs. World GST:
It is important to explore the concept of GST as it applies around the world, then delve into the specifics of how GST relates to India. A hundred-and-forty countries are already familiar with the goods and services tax (GST) but India’s GST is complicated and very different from the global variety. A multi-tier tax rate structure and complex rules make execution of this mammoth indirect tax a herculean task.
|Country||Rate of GST / HST / VAT|
|Canada||Ranges from 13% to 15%|
|New Zealand||Peak rate: 15%|
|India||Largely 18%, range from 12% to steep 28%|
Note: While levying such high tax rates, had the Government considered a higher threshold limit (i.e. greater than Rs. 20,00,000), it could have reduced the tax burden on small businesses. However, the Modi Government did not compromise on any and this will further boost to crony capitalism in India as small and mid-size businessmen will be the biggest losers with no aid from the Government.
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