Tuesday, November 22, 2016

The GST Issue

The passage of the Goods and Services Tax (GST) Bill, officially called the Constitution (One Hundred and Twenty Second Amendment) Bill, 2014  recently passed in the Rajya Sabha is seen as one of the biggest reforms undertaken by the government since the opening up of the economy in 1990. While there is some road still left to be travelled towards implementation, yet its passage in the Parliament ensures that it will be a reality soon. The GST seeks to replace Central Excise Duty, Service Tax and at the same time will subsume State VAT, Central Sales Tax, and Purchase Tax, among other taxes. In effect, this bill seeks to end the cascading effect of indirect taxation in India.

Before understanding GST, we must understand the present system of indirect taxation prevalent in India. The constitution divides taxation powers between centre and states. Both levels of government have some exclusive areas where they can levy tax. Income tax, which includes tax on company profits, is in the exclusive domain of central government. These taxes are referred to as direct taxes. Indirect taxes are taxes levied on manufacture of goods, provision of services and consumption, which are again in exclusive domain of central government. Taxes on consumption, on the other hand, are under the exclusive domain of state governments.

This system of indirect taxation had some problems. First, there was the issue of multiplicity of taxes. From the moment a product was manufactured, it was treated to a bevy of taxes from central excise to VAT.  This added to the total cost of the product which was borne by the final customer. Another problem was that, different states had different taxation rates. Some states had lower VAT rates compared to others. This created a chance of tax evasion and states lost out on revenue that it had to earn.

GST seeks to correct these anomalies in the system. It seeks to replace the indirect tax regime in India which is replete with multiplicity of laws and barriers in interstate movement of goods. At the fundamental, GST is a value added tax. This will be levied at all points in the supply chain where credits will be allowed for any tax paid on inputs acquired for use in making the output. Since the GST will be tax added on each stage of value addition, the final consumer will bear the GST charged by the last dealer in the supply chain, with set off benefits for all previous stages. It would be applicable for both goods and services wherein the exemptions given are minimum. A minimalistic system that has less discretion will function as a much more transparent and robust system. The GST regime seeks to correct those faults that were present in the indirect taxation regime. GST will make India one unified market.
GST will seek to help the consumer in the following ways. First, all taxes will be collected at the point of consumption. This means that if any product is taxed at 18% (which is the GST rate fixed for now), it will include both central government’s taxes and state government’s taxes. This will decrease the cost of goods in long run and can create an environment of lower inflation rates in the country. Seen in this light, GST can also play an important role towards achieving the recently announced inflation policy where the government will attempt to keep inflation at 4% with tolerance level pegged upto 2%. Second, once barriers between states are removed, we as consumers will not end up paying “tax on tax” which is what happens when goods move across state borders. It will also widen the tax base which is necessary for lowering tax rates and eliminating classifications. GST will result in harmonisation of Central and State tax systems which would reduce duplication and compliance costs. The automation of compliance costs will also result in reduction of errors, thereby increasing efficiency.
In keeping with the federal structure of the country, GST will have two components: Centre GST (CGST) and States GST (SGST). This is keeping in mind the fact that base and essential design features would be same. Both the system will be based on tax on the destination model. Thus, exports would be zero-rated, and imports would attract the tax in the same manner as domestic goods and services. Inter-State supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the destination State). The GST will be accompanied by the GSTN which will work towards capacity building among others. Officers are already being trained towards administering the new GST.
However the GST will face stiff challenges in its road to implementation in the coming years. The first challenge percolates to the rate at which GST will be launched. The prevailing sentiments seems to be at 18%, which will finally be decided and yet to be notified by GST council, in the long run. While different studies have pointed to different rates, it would undoubtedly help the consumers when the present rate would be fixed at a level which would negate the cascading effects of indirect taxation.
Another challenge that has to be encountered is administering the GST with minimum exemptions. New Zealand had the best GST model when it started out with the taxation rate fixed at 10% with almost zero exemption rates. However as most taxation analysts would like to point, tax policies can never be fixated in one particular realm, as with changing circumstances and economic behaviour, taxation policies need to change as well. Today, New Zealand has increased its taxation rate from 10% to 15% .Countries have fared better in administering the GST regime when they have reduced the exemption while widening the base. This is the challenge India will hope to encounter and successfully resolve.
The third challenge would be the implementation itself. India since its independence has achieved its political unity while the economic unity remains a distant dream. India is composed of various states with different financial standings .While states like Maharashtra and Gujarat are capable of generating their own revenues, the north eastern states, for example, are not on a strong financial footing. Yet the GST will seek to treat every state equally. While this would be challenging, yet it would also harmonise the country as an economic entity in the end. In the long run, GST seeks to benefit all and can truly act as a harbinger of the next round of economic reforms. The road to the same is tricky but the goal is worth it.
- Ibu Sanjeeb Garg ( Views expressed by the author are personal)

Sunday, August 7, 2016


The recent announcement of imposition of a “Fat Tax” in the Kerala budget has generated a lot of discussions around the country. The proposed tax seeks to tax burgers, pizzas and other processed foods at 14.5%. It also seeks to tax food served by major fast food brands.

Obesity has emerged as a global problem in the world today. According to a study published by acclaimed medical journal Lancet in 2014 India has the third largest number of obese people in the world. According to the study India is home to 30 million obese people. If the current trends continue, this number will skyrocket to 75 million by 2025. Childhood obesity tracks into adulthood, and is an important risk factor for the development later in life of type 2 diabetes mellitus, metabolic syndrome, among others. This has to do with unhealthy food, sedentary lifestyles and loss of traditional knowledge. In such a situation it is indeed laudable that Kerala has taken an initiative to tackle the problem.

The concept of Fat Tax is not new. A fat tax is an example of a Pigovian tax which seeks to impose a restriction on the unhealthy food regime that has emerged in the world. Japan was the first country in the world to impose the “metabo law”. This law which included measurement of waist sizes was sought as a tool to fight rising obesity numbers in Japan. Similarly in 2011 Denmark introduced a fat tax on certain products as a tool against rising obesity and lifestyle diseases. However after a fifteen month stint it was taken off because the law had failed to take off and the government admitted to people buying food from across the border.

Understandably the introduction of such a tax has lead to discussions whether the tax would serve any purpose. One of the first points of discussion has been with regard the financial rationale behind this taxation. This tax would add almost ten crores into the coffers of the Kerala government. Those who do not favour the tax argue that ten crores hardly make a difference into a budget that runs into thousands of crores. Industry insiders argue that such a tax will not signal a shift in consumption pattern but will only add to the burden of the customers. Moreover Kerala does not have large number of fast food chains compared to the other major southern states for this tax to make any major impact. In summation critics argue that this will only mean rising cost for the consumer.

Another major argument relates to the fact that fat tax on pizzas and burgers is essentially a non starter because such “Western” food constitutes a small part of the larger Indian dietary pattern. Indians have long been a haven of spices and oil with samosas , pakodas and other fried items almost inevitable in Indian menu. Kerala has its own share of fried items in form of the famous banana chips and beef fry. Each of this item carry huge threat potential to the health of the population .And thus imposition of tax on pizzas and burgers do not make sense.

Others argue that the Denmark failed experiment must be a lesson for those who seek to tax fast food. The failure of the government of Denmark to wind down the schemes within 15 months citing administrative burdens is a sign that such schemes are marked to fail.

However each of these myths must be addressed logically. The rationale behind this taxation is not so much as to earn taxes as to create awareness about the existence of health hazard. It is true that the Indian dietary menu consists of large share of unhealthy items however what can’t be denied is that products like pizzas and burgers have made rapid inroads into Indian markets and are soon poised to take over from traditional Indian foods. A recent judgment of the Delhi High Court in 2015 is noteworthy in this regard. The judgment delivered in 2015 sought to ban sale of junk food in school vicinity. It also sought to control and regulate the advertisements of such products in schools. This undoubtedly shows that policymakers recognise the obesity issue and awareness is the first step towards combating it. This tax would not so much as fill the government coffers as it would create awareness about healthy food items. In the long run such awareness will also spread over to traditional Indian unhealthy snacks. Hence such a tax should not be opposed merely because it targets only a particular category of items.

While the Denmark experiment has been a failure in some measure there are experiments around the world in different forms which have shown such schemes are successful. For example a “soft drink” tax imposed by Mexico in 2014 of one peso per litre resulted in the dropping of soft drink sales by 2%. It also added about 2 billion dollars in the government coffers, almost a third more than what the government had anticipated. While sales have picked up again since then, yet the rate of sales are nowhere near the pre taxation levels. On the other hand there have been successful experiments in Hungary, Finland and France of taxing one junk food item or another. In summation it can be concluded that governments worldwide are waking up to the reality of obesity and unhealthy lifestyle.

The most important component to this debate however is the threat to the poor. As any poor economist would tell us the poor are vulnerable to false impressions of a better lifestyle, because it signals aspiration. Burgers, pizzas and cold drinks are seen as symbols of a beter lifestyle. This is why perhaps there are stories of McDonalds employees mistreating street children who are later fed by benevolent customers. The fact that such street children hang around fast food chains is a testimony to the vivid imagery that these chains project. And it is this image to which the poor are most vulnerable. In a country like India which is confronting the poverty challenge boldly, providing a better food basket is an important part of that challenge. And it is towards this that the projection of fast food has to change from being a symbol of growth to one that is fraught with its dangers.

As we move into a global order, food habits and dietary charts will undoubtedly change. For example the consumption of pulses have rapidly fallen in India .Yet it is important to keep reinventing the basket so that at any point it offers a healthy modicum of choices for the consumer. And it is towards this change of perception that the fat tax should be seen. It is not a tool to earn revenue or rapidly shift the consumer consumption pattern. It must be seen as a indicator that seeks to check and balance our dietary behaviour should it reach dangerous levels.