Fiscal Policy vis-à-vis Goods and Services Tax regime in India

Aadarsh Kothari[1]

Abstract

Goods and Service Tax could be denoted as the biggest tax reform in the nation that affected each citizen in his daily endeavours. It was a successful attempt to transform $2.4 trillion of the Indian Economy by removing internal tariff barriers and introducing a single-indirect taxation system. The roll out bestowed the people of India with a new hope of achieving the goal of transforming its economy to a “super power economy”. The primary intent of the government for invoking this system of taxation was to boost indigenous manufacturing. Several developed countries have a similar taxation system. The most notable being the United States of America. The paper attempts to analyze the different corporation tax brackets that exist. The rates applicable have often been the bone of contention and have ignited quarrels amongst the traders, business class and industrialists. The sectors which have been the most affected by this decision is the organized sectors and its subsidiaries.   It also focuses on whether the light of hope will overshadow uncertainty that the Goods and Services Tax poses.

Introduction

Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. The role and objectives of fiscal policy have gained prominence in the current crisis as governments have stepped in to support financial systems, jump-start growth, and mitigate the impact of the crisis on vulnerable groups.[2] Owing to the change in the philosophy of State-run economy, in the wake of such complicated schemes, the state needs a huge administrative apparatus. Before 1930, an approach of limited government, or laissez-faire, prevailed.[3]With the stock market crash and the Great Depression, policymakers pushed for governments to play a more proactive role. More recently, countries scaled back the size and function of government, with markets taking on an enhanced role in the allocation of goods and services. The tools of fiscal policy control can be defined as follows:

  1. Taxation-Taxation is a powerful instrument of fiscal policy in the hands of public authorities which greatly affect the changes in disposable income, consumption and investment. An anti- depression tax policy increases disposable income of the individual, promotes consumption and investment. Obviously, there will be more funds with the people for consumption and investment purposes at the time of tax reduction.[4]
  2. Public Expenditure– The classical economists propounded the principle of annually balanced budget. They defended it with force till the deep rooted crisis of 1930’s.
    The excess of public expenditure over revenues are financed through public borrowings. The cyclically balanced budget can stabilize the level of business activity. During inflation and prosperity, excessive spending activities are curbed with budgetary surpluses while budgetary deficits during recession with rising extra purchasing power.[5] Hence, with a comprehensive expenditure, the motives of the Government can be defined.
  3. There are several other tools to control fiscal policy such as Keynes Public Work’s Theory, Public Spending schemes and revenue generating techniques undertaken by the government.

Goods and Service Tax as an Instrument of Fiscal Policy

The implication of Goods and Services Tax on Fiscal Policy has been through leaps and bounds. It has been termed as a ‘revolution in taxation arena’[6]in this decade. The low levels of government spending in India can be attributed to lower levels of revenues, especially tax revenues. When there are more tax revenues, it increases the room in a government’s budget so that it can spend more without borrowing. This lower fiscal space is not expected to improve too much over the course of the next few years.[7]

The Indian economy is set to revert to its trend growth rate of 7.5 percent in the coming years as it bottoms out from the impact of the Goods and Services Tax (GST) and demonetization, a new World Bank report says. India’s long-term growth has become more steady, stable, diversified and resilient. In the long-run, for higher growth to be sustainable and inclusive, India needs to use land and water, which are increasingly becoming scarce resources, more productively, make growth more inclusive, and strengthen its public sector to meet the challenges of a fast growing, globalizing and increasingly middle-class economy.[8]

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Chart Depicting Collection of Tax Surge Post GST Regime

Tax revenue to the central government rose 18% to Rs 17.1 trillion in the year ended 31 March, aided by steady growth in direct taxes and a sharp jump in excise and service tax receipts. The robust growth comes despite the economy getting hit by a temporary cash crunch because of the government’s decision to withdraw high-value currency notes in November. Central excise duty collection rose 33.9% and service tax collection rose 20.2% in 2016-17 even as the economy slowed to 7.1%. This may be because of better tax compliance in the wake of the government’s crackdown on black money.

Implications of Goods and Services Tax on Fiscal Policy

The Goods and Services Tax (GST) is a vast concept that simplifies the giant tax structure by supporting and enhancing the economic growth of a country. GST is a comprehensive tax levy on manufacturing, sale and consumption of goods and services at a national level.[9] The Goods and Services Tax Bill or GST Bill, also referred to as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, initiates a Value added Tax to be implemented on a national level in India. GST will be an indirect tax at all the stages of production to bring about uniformity in the system.

Proposed Goods and Services Tax regime in India

The proposed GST regime is a half-hearted attempt to rationalize the indirect tax structure. More than 150 countries have implemented GST. The government of India should study the GST regime set up by various countries and also their fallouts before implementing it. At the same time, the government should make an attempt to insulate the vast poor population of India against the likely inflation due to implementation of GST. No doubt, GST will simplify existing indirect tax system and will help to remove inefficiencies created by the existing current heterogeneous taxation system only if there is a clear consensus over issues of threshold limit, revenue rate, and inclusion of petroleum products, electricity, liquor and real estate.[10] Until the consensus is reached, the government should resist implementing such a regime.

Again there appears to be lack of consensus over fixing the revenue rate as well as threshold limit. One thing is for sure, services in India are going to be steeply costly if GST is fixed above the present service tax rate of 14% which in turn will spiral up inflation in India. “Asian countries which implemented GST all had witnessed retail inflation in the year of implementation”.[11]

GST Council and its functions

The GST Council is a federal forum with both centre and states in India on board. It is made of:

  1. The Union Finance Minister (as Chairman),
  2. The Union Minister of State in charge of Revenue or Finance, and
  3. The Minister in charge of Finance or Taxation or any other Minister, nominated by each state government.

The decisions of the GST Council are made by three-fourth majority of the votes cast. The centre has one-third of the votes cast, and the states together have two-third of the votes cast. Each state has one vote, irrespective of its size or population.

Apart From the Above                           

  1. The Secretary (Revenue) will be appointed as the Ex-officio Secretary to the GST Council.
  2. The Chairperson, Central Board of Excise and Customs (CBEC), will be included as a permanent invitee (non-voting) to all proceedings of the GST Council.
  3. One post of Additional Secretary to the GST Council in the GST Council Secretariat (at the level of Additional Secretary to the Government of India) will be created.
  4. Four posts of Commissioner in the GST Council Secretariat (at the level of Joint Secretary to the Government of India) will also be created.

As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to GST, like

  1. Taxes, cesses, and surcharges to be subsumed under the GST;
  2. Goods and services which may be subject to, or exempt from GST;
  3. The threshold limit of turnover for application of GST;
  4. Rates of GST;
  5. Model GST laws, principles of levy, apportionment of IGST and principles related to place of supply;
  6. Special provisions with respect to the eight north eastern states, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand; and
  7. Other related matters.
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GST rates will include the floor rates with bands, special rates for raising additional resources during natural disasters / calamities, special provisions for certain States, etc.

Since GST Council is now an arm of the Constitution, duly constituted to carry out various functions in relation to proposed GST law, the Empowered Committee of State Finance Ministers will not be a forum to discuss or recommend anything in relation to GST. However, a decision to continue to have Empowered Committee or to dissolve it, may have to be decided by the Empowered Committee itself keeping in mind that there does not appear to be any need to have its existence at the moment, more so when the Constitution of GSTC includes almost all the members of the Empowered Committee. Further, the GST law may not recognize Empowered Committee at a body whose decisions are either recommendatory or binding on the GST authorities.

Revenue Collection Post-GST Era & Estimations

The total Central GST revenue is Rs 14,894 crore, State GST revenue is Rs 22,722 crore, Integrated GST revenue is Rs 47,469 crore. The IGST revenue of Rs 47,469 would be apportioned between the Centre and states based where the taxes were due.If budget estimates are extrapolated to arrive at a monthly collection number, the Centre should have got Rs 48,000 crore and all states put together another Rs 43,000 crore. In July of last year, Rs 31,782 crore of excise duty and Rs 19,600 crore of service tax were collected.The revenue under IGST will be allocated between the CGST and the SGST to the extent that the same is used for payment of CGST/SGST. This exercise will be done based on the cross-utilisation report to be received from the GSTN. Exact revenue figures of the Central and the State governments respectively will be known after this exercise is complete before the end of this month.

The Central Government finances went through a considerable degree of consolidation in the last three years, aided by buoyant tax revenues that largely sprang from additional revenue measures and subsidy reduction related to reduced petroleum prices. The quality of spending improved with a gradual tilt towards capital expenditure. The fiscal outcome in 2016-17 was marked by robust growth in tax revenue—stemming largely from excise taxes on petroleum– and consolidation of non-salary/pension revenue expenditure and of borrowing. The Union Budget for 2017-18 opted for a gradual rather than the sharp consolidation path recommended by the FRBM Review Committee, prudently balancing the requirements of a cyclically weakening economy and the imperative of maintaining credibility, especially in the wake of disruptions to state government finances, reflecting their absorption of the DISCOM liabilities under the UDAY programme.[12]The Centre is watchful about its finances in the first year of GST. State finances now face stress from potential farm loan waivers. And with public sector enterprises tending to consolidate, public investment growth in 2017-18 may moderate.

Shortcomings in the Current GST Regime

The very first attraction towards implementation of GST has replaced 15 Indirect taxes. It is to one’s amazement and wonder that 15 taxes did seem like a lot of chaos and confusion. How does such a tax system function and where was it actually lacking?

  1. Tax Dropping: The most significant contributing factor to tax cascading is the partial coverage by Central and State taxes. Sectors that are exempted are not allowed to claim credit for the CENVAT or the Service Tax paid on the inputs.
  2. Levy of Excise Duty on Manufacturing Point: The CENVAT is levied on goods manufactured or produced in India. Restricting the tax to the point of manufacturing is a severe obstruction to an effective and unbiased application of tax. For example, valuation as per excise valuation rules of a product, whose consumer price is Rs. 100/, is, say, Rs. 70/-. In such a case, excise duty as per the present provisions is payable only on Rs.70/-, and not on Rs.100/-.
  3. States are Unable To Levy Taxes On Services: they have no powers to collect tax on incomes or the fastest growing constituents of consumer expenditures, the States have to rely almost exclusively on compliance improvements or rate increases for any flexibility in their own-source revenues.
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As per the proposed Tax system, the input of Central GST can be used only for payment of CGST & the input of State GST can be used only for payment of SGST. Cross- Utilization of input of CGST in payment of SGST and vice-a- versa, is not allowed. The notion of having one merged indirect tax in place of several previously existing indirect taxes is to benefit the Indian economy in a number of ways:

  1. It will help the country’s businesses gain a level playing field.
  2. It will put us on par with foreign nations who have a more structured tax system.
  3. It will also translate into gains for the end consumer who hasn’t pay cascading taxes any more.
  4. There will now be a single tax on goods and services.

On bringing GST into practice, it has amalgamated Central and State taxes into a single tax payment. It would also enhance the position of India in both, domestic as well as international market. At the consumer level, GST would reduce the overall tax burden, which was estimated at 25-30%.

Partisanship and Taxation Rates under GST Regime

The GST council has often been accused of favouritism of considerable reducing the rate of certain items by accommodating their geopolitical preconceived notions. The leading example is the textile industry in Western India i.e. primarily in the State of Gujarat. The initial rate of taxation on textiles was 12% which later was reduced to 5%.[13] Primarily, because of protests and wide-spread strikes by textile manufactures. These incidents try to jeopardise the Nation’s Economic Policy and promote community interests.

Conclusion

As mentioned earlier, the proposed GST regime is a half-hearted attempt to rationalize indirect tax structure. More than 150 countries have implemented GST.[14] The government of India should study the GST regime set up by various countries and also their fallouts before implementing it. At the same time, the government should make an attempt to insulate the vast poor population of India against the likely inflation due to implementation of GST.[15]No doubt, GST will simplify existing indirect tax system and will help to remove inefficiencies created by the existing current heterogeneous taxation system only if there is a clear consensus over issues of threshold limit, revenue rate, and inclusion of petroleum products, electricity, liquor and real estate. Until the consensus is reached, the government should resist from implementing such regime. The focal points proposed by GST council shall be strictly considered to keep the wheel rolling relentlessly.


[1] Student, B.A., LL.B. (H), Amity Law School, Amity University, Noida, UP

[2] Mark Horton & Asmaa El-Ghainy, Back to Basic, International Monetary Fund Report (December 18, 2019) https://www.imf.org/external/pubs/ft/fandd/2009/06/pdf/basics.pdf

[3] Daniel, James, Jeffrey Davis, Manal Fouad, and Caroline Van Rijckeghem, 2006, Fiscal Adjustment for Stability and Growth, IMF Pamphlet 55 (Washington: International Monetary Fund).

[4] Pragyandeep, 5 major instruments of fiscal policy, Economic Times, http://www.economicsdiscussion.net/fiscal-policy/5-major-instruments-of-fiscal-policy/4696.

[5] Ibid.

[6] Livermint (December 18, 2019), http://www.livemint.com/Politics/99hZqzvxfdwmZKgkbWORrO/GST-one-of-the-most-complex-and-second-highest-tax-rate-in.html, GST is one  of the most complex taxation system in the world.

[7] Tax Revenue Review, Centre for Budget and Governance Accountability, YOJNA March, 2018.

[8] Junaid Ahamad, World Bank Country Director in India, World Bank, http://www.worldbank.org/en/news/feature/2018/03/14/india-development-update.

[9] The Economic Times, Featured Articles from The Economic Times, (2009) https://economictimes.indiatimes.com/configspace/etmain_static/content/defaultinterstitial.html

[10] P Mehra, Modi govt.’s model for GST may not result in significant growth push, The Hindu, (2015), http://www.thehindu.com/business/Economy/modi-govts-model-for-gst-may-not-result-in-significant-growth-push/article7625827.ece

[11] SKP, GST:Impact on the Telecommunications Sector in India (December 18, 2019),  http://www.skpgroup.com/data/resource/skp_gst_impact_on_the_telecommunications_sector_in_india_.pdf

[12] Fiscal Development, Chapter 02, http://www.indiabudget.gov.in/es2016-17/echap02_vol2.pdf

[13] Fibre to Fashion, GST rate on Velvet Fabric reduced to 5% (December 18, 2019),                                                                                         http://www.fibre2fashion.com/news/textile-news/gst-rate-on-velvet-fabric-reduced-to-5–240197-newsdetails.htm

[14]  The Hindu, Business Line, https://www.thehindubusinessline.com/economy/policy/big-gst-relief-tax-cut-on-178-items-only-50-still-in-28-slab/article9952407.ece

[15] Dr.Shifali Dani, Business and Economics Journal(December 18, 2019), https://www.omicsonline.org/open-access/a-research-paper-on-an-impact-of-goods-and-service-tax-gst-on-indianeconomy-2151-6219-1000264.pdf

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