DNA Edit: The GST conundrum

Finance Minister Arun Jaitley’s statement that a lesser number of slabs under the GST can be considered once there is revenue buoyancy needs to be upended. Instead of relying on revenue buoyancy to engender a reduction in tax slabs; a reduction in tax slabs, as well as rates, should be implemented so that it results in revenue buoyancy. Currently, India has five tax slabs under the GST: 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent.

Such a complex and stratified slabbing only serves to stoke the number of litigations in this new domain of taxation law. Already, classification disputes are cropping up which give an undesired leeway to the taxman to exploit the gray areas of GST for his personal gain. For instance, tax rates ranging from zero to 28 per cent apply to hotels, and the final determinant of how much tax one has to fork out for his hotel stay is determined by how much one is charged. This sort of grey area incentivises hotels to fudge their books. On the other hand, it inadvertently allows the taxman a leverage to harass the unwitting yet honest taxpayer.

Meanwhile, the sorry state of merchandise exporters is hidden from none. India’s exports have been floundering for the last few quarters while other developing countries like Vietnam have outranked India in its cumulative exports over the years. Additionally, a strong inflow of foreign funds has helped the rupee appreciate which has strongly hurt the prospects of the exporters. Not helping the cause of the exporters is the working capital crunch which has come to the fore after the implementation of GST. Under the new tax, exporters are allowed to claim refunds on inputs that are employed for producing goods for exports.

Unfortunately, the process for claiming refunds is getting delayed day by day as the government is frequently pushing back the deadlines for filing returns. As per the state of affairs that exists currently, exporters will be getting refunds for taxes paid in July in the month of December. This has lead to a severe working capital crunch which is further compounded by large corporates holding back on payments because of uncertainty in tax liabilities. The need of the hour is to have not just fewer slabs, but also a lower rate of taxation under the GST. Tomes upon tomes of economic literature will testify that a higher taxation level retards demand and consumption and consequently puts the brakes on economic growth. Throughout modern economics, high taxes have always been regarded as a precursor to an economic slump. Yes, the government coffers can be enriched at the cost of the common man, but this trend can only go so far before the layman starts cutting back on his expenses. Thankfully, the higher tax burden on small taxpayers is not lost on the Finance Minister.