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Creating ‘One India’ market: GST can well prove to be India’s EU moment

One of the several reasons why GST’s implementation has faced political hurdles is the fear that it could rob state governments of their fiscal powers. But we need to ask one question? Can India afford to remain a collection of several different markets governed by different sets of tax rules and rates. States should realise that it is in their interest to create a “One India” market

columns Updated: Aug 07, 2016 01:18 IST
According to a road ministry study, a typical truck spends nearly 16% of the time at check posts or at toll plazas in queuing up to pay a tax only to pass through a state.
According to a road ministry study, a typical truck spends nearly 16% of the time at check posts or at toll plazas in queuing up to pay a tax only to pass through a state.(HT File Photo)

If you drive a car, I’ll tax the street; If you try to sit, I’ll tax your seat; If you get too cold I’ll tax the heat; If you take a walk, I’ll tax your feet; Taxman. Cause I’m the taxman; Yeah, I’m the Taxman.

In many ways these lines from The Beatles’ 1966 number, Taxman sums up India’s indirect tax structure: An untidy patchwork of central and provincial levies that cause red-tape, confusion and corruption.

Sample this list of mumbo jumbo: Central excise duty, additional excise duty, duty levied under the Medicinal and Toiletries Preparation Act, service tax, countervailing duty, special additional duty of Customs, VAT, CST, entertainment tax, octroi, purchase tax, luxury tax, taxes on lottery, betting, gambling and cesses and surcharges.

Phew! That’s one bundle of gobbledygook you would rather do without on a Sunday morning. But that’s how our taxes are structured, and you and I often do not realise it.

The Goods and Services Tax (GST) seeks to precisely address this concern by offering a single shot solution. Once adopted, it will dramatically alter tax administration by consolidating this web of levies into a single tax.

When you dine out in a restaurant, I am sure, like me, you often get the feeling that you have paid much more than expected. Here’s why. A usual bill in a restaurant has these components: Food bill, service charge, VAT, and service tax.

Read | GST bill gets Parliament nod: A look at what happens next

The food bill is the base cost of fare that the restaurant charges, depending on your order from the menu. The service charge, on the other hand, is a fee that restaurants levy for the “services” that they render like serving food etc. This is not a government levy. Each restaurant decides on their own rate that usually varies from 8%-12%. It is identical to a mandatory tip. Value Added Tax or VAT is levied on sale of food and alcohol in an eatery. A restaurant not only sells food, but also renders a kind of hospitality service. For this service tax is levied.

You don’t need to be an economist to understand how such a muddle of levies can strain an economy. On many occasions you may have sped past a long line of lorries on both sides of a state’s border. These row of trucks, sometimes running into miles, have to pay entry taxes or octroi. It is a tariff commercial road carriers have to pay before entering into the geographical territory of a state.

Read | Tired of queuing up, truckers seek early rollout

Needless to say that these slow down the system. According to a road ministry study, a typical truck spends nearly 16% of the time at check posts or at toll plazas in queuing up to pay a tax only to pass through a state.

As a result of these welter of inter-state taxes, firms currently face lengthy transportation delays owing to stoppages at interstate check-points for tax compliance checks. According to one study by a government-appointed panel, eliminating check-point delays can enable trucks to travel six hours more per day, thus reducing transportation time and costs and boosting productivity.

It doesn’t end at octroi at border posts alone. A good’s ride from the factory gate to the household is quite an experience, not pleasant to say the least. It has to withstand not just the rough-and-tumble of India’s roads, but also a complex fiscal maze of local and central levies and taxes before completing its destination at the final point of consumption.

Hopefully, with GST such labyrinthine taxes will be a thing of the past. The layers of taxes in a restaurant bill, for instance, will morph into a single levy — GST — subsuming VAT and service tax into it.

Read | GST Bill passed, but rollout may be tricky

Investors want hassle-free entry into the Indian economy. India continues to be seen as a difficult destination for anyone wanting to do business there, a fact that even state governments now have begun to admit.

India is ranks 130 among 185 economies in the World Bank’s latest ‘Doing Business’ report. Starting a business in India is daunting — requires going through 14 procedures, which can take 29 days and can be expensive. Registering a property or building a warehouse is time-consuming.

States’ involvement is critical, particularly for a country like India, where some pockets compare with the world’s richest nations, while many others can match up only to the poorest countries of sub-Saharan Africa.

Experts often point out that ambiguous tax laws and byzantine local levies are among the a barrage of hurdles that analysts often blame for keeping away large-scale private investments in what should otherwise count as a massive, attractive market. It doesn’t because each state operates like a separate country with its own set of laws and rules. Such a state of affairs is not happy augury for a country that takes pride in becoming the world’s fastest growing major economy.

Read | New tax system a historic opportunity for India, says CEA on GST

I can’t help but recall a story of the ace sleuth Sherlock Holmes and his trusted aide Dr Watson, where the duo track to a thinly inhabited area in England to solve a case. Exhausted after walking many miles and with darkness fast descending, the two decide to put up a tent to retire for the night. In the middle of the night, Mr Holmes wakes up Dr Watson, who visibly angry for being shaken out of a peaceful slumber, gesticulates what the matter was. Mr Holmes, in his characteristic calm demeanour, asks Dr Watson to describe what he saw. Dr Watson, rubs his eyes, looks at the sparkling firmament and exclaims in excitement that it is so different from a concrete London where he had almost forgotten how a starry sky looks like. An exasperated Mr Holmes throws up his hands in despair and says, “Watson. Someone stole our tent.”

Mr Holmes and Dr Watson’s tale has a pertinent lesson for contemporary business and policymaking. It is quite often that we miss the obvious in search of the solutions to what we consider ‘complex’ problems. Quite often very basic and simple facts escape our attention.

Read | 2017 could be India’s breakout year for policy making. Here’s why

One of the several reasons why GST’s implementation has faced political hurdles is the fear that it could rob state governments of their fiscal powers. But we need to ask one question? Can India afford to remain a collection of several different markets governed by different sets of tax rules and rates. The fiscal hurdles among states have kept away large-scale investments in what should otherwise count as one massive, attractive market. Every deadline missed translates into fewer jobs created, lesser revenues for states, and lower investments made. India cannot afford to delay its date with a unified nationwide indirect tax system forever. As John Maynard Keynes had once famously said, “When Facts Change, I change my mind, What do you do Sir?” States should realise that it is in their interest to create a “One India” market.

GST can well prove to be India’s EU moment.