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GST will reduce cases of unreported sales as billing will be mandatory
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Wednesday, 16 August, 2017, 08 : 00 AM [IST]
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Dinesh Shahra
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The history of taxing goods, trades and services goes back thousands of years. Guidelines for revenue collection and taxation can be found in ancient Indian literature, including the Mahabharata, Manusmriti, Shukranitisar and the Arthashastra. Kautilya's Arthashastra, written over 2,300 years ago, covered the science of economics, which includes budgets, taxation and revenue collection.
Kalidasa, in his epic Sanskrit poem Raghuvamsham, which traces the roots of the great lineage of Lord Rama and his descendants and the great conqueror Raghu, stated while eulogising King Dalip, “Prajanam eva bhuty artha? sa tabyho balim agrahit /sahasragu?am utsra??um adatte hi rasa? ravi?,” (which means, “It was only for the good of his subjects that he collected taxes from them, just as the sun draws moisture from the earth to give it back a thousand times!”)
After the establishment of British rule and following the Mutiny of 1857, the British government introduced a taxation system in response to the financial crisis they were facing. The tax system was modelled largely on the lines of the British system prevailing then. The system after Independence carried the baggage of the British system with a maze-like assortment of taxes.
We must take inspiration from our epics and address the maze of indirect taxes to simplify them, so that the entire nation can progress as one unified nation. The restructuring of the tax system has been a major component of fiscal reforms that began in 1991 with the direct taxes, and the benefit of this has been seen in the past decades of industrial growth and development.
And now it is the turn of goods and service tax (GST) to take the nation to new heights in growth and development. At present, indirect taxes include more than 25 different tax rates on various goods and services that are levied by the Centre and states. The GST will collapse these different rates into a simplified structure.
The passage of the GST Bill fulfills a long-standing demand of Indian industry for a single simplified taxation system that addresses a unified national market. The concept of a single tax was first mooted by India’s former prime minister Atal Behari Vajpayee, and it has taken 16 years for it to see the light of day in the form of GST. The fitment of rates has been approved and it is gratifying that agricultural produce is now at zero rate, giving organised players a much-needed level playing field against unorganised players who used to evade taxes. While the rates on essential commodities such as edible oil at five per cent is on expected lines, the fitment of rates on processed foods is a disappointment. The rate of 12 per cent on soy bari (soy chunks) or texturised vegetable protein and five per cent on soy flour will prevent the most economical and nutritionally the most-valuable protein from being widely used in the fight against protein malnutrition. It is hoped that the government will relook at the rates on essential and important processed foods like soy bari and put them in the exempt category.
India is a vast country with many states. It can be said to be federal in structure, but it is unitary in spirit. Each state has its advantages in terms of natural resources like rivers, water bodies, mineral deposits, forests, etc. Each state also faces different challenges like variation in quantum of monsoon, tendency to natural disasters, access to ports, etc. Each state vies with the other to attract industries that will help bring investment in the state and state-level policies sometimes result in lopsided development, with a few states outshining the others in attracting investment.
GST is our government’s answer to the challenge of ensuring efficient economic development across various states, while allowing each state to maintain their independence. GST aims to provide a simple method of taxation for a unified national market for both goods and services. It helps remove the barrier of variations in taxes across states that the industry faces.
GST will reduce the incidence of unreported sales since billing and payment of tax would be necessary for availing the set-off of taxes at each stage. This is especially true in transactions between traders in agricultural commodities where suppressed and unreported sales are prevalent in the unorganised sector.
GST will be the one single tax that will amalgamate all Central and state indirect taxes. This is hugely beneficial for a producer of goods or a service provider, as it will be a value-added tax (VAT) at each stage allowing the supplier at each stage to set off taxes paid at previous levels. With uniform tax rates across the country, it will promote cost-effective production, as industry can be set up based on factors like availability of resources, access to transport, etc., and not on the fiscal benefits that the states give as a carrot. This will improve transportation times and curtail wastage. There will be an improvement in the terms of trade in favour of agricultural vis-a-vis manufactured goods. Industries will now be able to cater to a huge unified national market!
The government will also be in a sweet spot with better compliance by industries and the broadening of the tax base, leading to an increase in tax revenue, increase in exports from efficient production and a growth in the gross domestic product (GDP).
For agriculture, there is another booster that is in the process of being set up. The government has announced the formation of a national agricultural market (NAM) for efficiency in agricultural marketing.
This will be an integrated system of market of agricultural produce at the national level, allowing enhanced regional cooperation with free flow of agricultural commodities across the states.
Sellers and buyers anywhere in the country will be able to sell and bid respectively for a commodity. Integration of banks and financial institutions will enable electronic settlement of receipts and payments.
When fully developed, the NAM would be a comprehensive national market that integrates markets and functionaries, along with support services like warehousing, transport, banking, insurance, finance, promotion, etc.
The advantages of a national market would allow the participants to participate in a transparent manner with fair competition. It would allow efficiency in operations. It would promote a faster and more equitable spread of market information with reference to price and risk. The NAM will help scale up sizes of business and attract bigger players.
Just as GST requires the states to sacrifice some fiscal autonomy, the NAM will also require states to let go of their control over the state level agricultural markets or agricultural produce market committees (APMCs). Considering the level of state-level political involvement in the agricultural markets and sensitivity of local issues, the NAM will require great political will. The separate APMC Acts in each state with their tax-related, physical and statutory barriers will need to be integrated in the national marketing system. It is hope that with the current government in power in the majority of states, this will be an attainable goal. Once this is in place, private sector participation will be required to develop the necessary infrastructure.
The advent of GST on the heels of demonetisation is set to herald an era of a transparent national market for agricultural trade. Bolstered by the NAM, this promises to take trade in agricultural commodities to a whole new level. For organised players, this is an opportunity to transition to a new way of doing business to change fortunes forever, for the better!
(The author is founder and managing director, Ruchi Soya Industries Ltd.)
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