Common mistakes made with GST
First, the political leadership didn’t realize until quite late within the day that GST is basically a flat tax, with variations. So all the products consumed by the poor, and broadly enjoying favourable tax treatment, would now attract a better tax. Equally, the products consumed by the rich would attract a lower tax.
So the poor would find themselves paying more, and therefore the rich correspondingly less if the GST rate were revenue-neutral. That led to the primary mistake: Going political, and introducing extreme progressivity in GST rates (all the way from zero to 28%).
This was GST without the logic of GST. The second mistake was to vow the states a guaranteed 14% increase in GST revenue from one year to the subsequent. This, when a replacement monetary policy framework was being put in situ for the depository financial institution, with a target rate of 4% (with 2 decimal point variation on either side).
What this meant was that an economy growing at 7% would ordinarily be expected to deliver nominal growth (including inflation) of about 11% — well in need of the 14% revenue buoyancy promised to states.
The compensation cess was available to assist bridge the gap, but just for five years. The third mistake was to stay key goods outside the scope of GST (petroleum products, tobacco, liquor). Since these have usually accounted for the majority of excise revenue, it affected calculations on what a revenue-neutral GST rate may well be. The fourth mistake was the drive by the Modi government to lower the price of products within the run-up to the overall election.
In the process, the charge per unit on many consumption goods was dropped quite the charge per unit on their inputs. So we now have companies claiming refunds of taxes on inputs that are quite the GST they pay on their final produce!
Meanwhile, within the implementation phase, we’ve got seen a repeat of what happened within the wake of the demonetization three years ago: People found all types of creative ways to show black into white. In the case of GST, we seem to possess spawned a fake-bill industry that gives convenient bills to producers, as chunks of the assembly chain seem to possess found the way to flee the GST net.
The initial promise, that eventually bills would be matched as the simplest way of preventing such fraud, is put to the test in April; we’ll see if it’s doable or simply causes chaos. If it doesn’t work, it’ll have belied one amongst the central promises of GST, that it’d address nonpayment and lift the tax share of GDP.