By Aparajito Sen
India has ranked 172 out of 190 participating countries for simplicity in taxation systems according to the World Banks 2016 report on ‘Ease of Doing Business’. The soon to be implemented Goods and Services Tax (GST) is expected to radically transform the indirect tax regime and simplify the same for private as well as public benefit.
The new tax reform will do away with the earlier cascading tax effect, allow sellers to gain input tax credit and provide for administrative simplicity. In doing so, the policy is expected to boost foreign investments, apart from simplifying taxation mechanisms for local businesses.
All of this is expected to boost investment and catalyse economic growth. The Finance Minister holds that GST could boost GDP growth of the Indian economy by 2%, although there is no basis to support this claim.
Reading between the lines
Now, it is important to analyse the merits of these submissions and determine whether GST would actually benefit business interests. One must note that sellers are not expected to gain major benefits from the elimination of the cascading effect of taxation unless their supply chains are long and cross state boundaries. Moreover, the anti-profiteering clause in GST would disallow sellers from deriving benefits from these amounts saved.
The purpose of the anti-profiteering clause is to ensure that the benefits sellers derive from GST are passed on to the end consumer. Ideally, this should increase the demand for consumer goods or services, which should ultimately benefit the seller. However, one must acknowledge that several goods and services that are to be taxed at a higher rate are luxury commodities, the elasticity of demand of which is expected to be high.
Harassment over profiteering
One must also note that the anti-profiteering provision is prone to misuse. It has been noted by experts that to conclusively prove the passage of tax benefits from sellers to end consumers is nearly impossible. Tax departments are known for having harassed assesses over unsuitable claims. Given the ambiguity in the provision relating to anti-profiteering, it may well be that the provision is misused by the concerned tax authorities.
Small businesses are not likely to benefit from GST since most of such businesses do not indulge in inter-state transactions and deal in short supply chains. On the other hand, a GST regime is likely to be cumbersome on smaller entities due to the increased number of returns they would have to file. Sellers will be expected to file 37 returns in a year- with 3 returns being filed every month and an annual return being filed at the end of the year when previously they were expected to file 13 returns annually (on an average). This would be particularly detrimental to the service sector which is currently expected to file only 2 half-yearly returns in a year. The administration process of GST, thus, would not be simple for business entities.
GST shall be one of the most radical transformations made to the indirect taxation system in India and one must, thus, weigh its impacts and benefits. The claims of increased GDP growth rate must be substantiated given that an underlying object of the policy was to simplify business processes and catalyse investments. The overall impact of GST on the economy can only be known after the full course of its implementation is complete. One should hope that the policy benefits the Indian economy in the long run, however, the inane faults in the same must be acknowledged.
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