One Nation, One Tax: The Impact of India's Goods and Services Tax
Rohith Jyothish, 10 Nov 17
       

Image by Tiven Gonsalves via Wikimedia Commons. CC BY-SA 4.0

The Goods and Services Tax (GST) launched in India on 1 July is a new indirect tax structure which removes the cascading of several taxes on goods and services levied by the central government as well as individual states.

The aim of GST is to facilitate easy compliance, uniformity of tax rates and structures, easy administration, revenue efficiency in order to boost domestic production. But the GST has triggered massive protests and criticism throughout India among small businesses and trade groups.

Each producer in a supply chain now needs to show invoices of its produce to claim input tax credits. This registers the entire supply chain through a self-policing mechanism. The new structure has raised a lot of questions in terms of roll out. The opposition was quick to criticize the government for the ‘mess’ of its ‘hasty’ roll out. Public opinion is also divided.

The national spokesperson of the Indian National Congress party, Sanjay Jha tweets:


Over 160 countries have adopted some form of GST, a notable exception being the USA. However, in a country where the informal sector accounts for at least for one-third of the gross domestic product (GDP), and four-fifths of employment (UNCTAD 2017), GST is expected to come at a cost, especially when it follows the dramatic demonetization of 86% of circulating cash in November 2016.

While macroeconomic indicators show factory activity in July slowing down to the lowest levels in nine years, and a further slowdown in exports because of the GST, damage to the informal sector is much more difficult to measure.

India's GST rate structure under scrutiny

The first line of criticism relates to the rate structure set by the GST Council, a newly formed council chaired by the union finance minister and finance ministers of all 29 states of India as members.

Goods and services in India currently have five tax rates: 0%, 5%, 12%, 18%, and 28%. Additionally, there are special rates of 0.25% for uncut diamond and 3% for gold, silver, and processed diamond. This does not include GST-exempted goods such as alcohol, petroleum, electricity, healthcare, education, land, and real estate as well as cesses on goods in the 28% rate in order to compensate states for losses in tax revenue.

In a report in December 2015 by a committee headed by Arvind Subramanian, Chief Economic Advisor, it warned that the “broader the scope of exemptions, the less effective GST will be.”

Veerappa Moily, an opposition member of the Upper House of Parliament, amusingly summed up critics’ questions about the logic of new rates:

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