Key GST Lessons From The World

The long march to implement the long-awaited Good and Services Tax in India has just begun. It is instructive to understand how other countries introduced this tax and cherry-pick lessons from their experiences

As India gets ready to celebrate the 70th anniversary of its independence, it is also preparing for another important milestone. Great hopes have been pinned on the Goods and Services Tax (GST), which will liberate Indian citizens from the tyranny of multiple levies and tax rates. This tax will unite almost all state and central indirect taxes into one single category, thereby creating a true single market in the country.

The passage of the Constitution (122nd amendment) Bill on 3rd August in the Rajya Sabha marks the crossing of the first hurdle in implementing the transformational GST regime. However, there is still substantial legislative work to be done – apart from the amendment (which will now travel to the Lok Sabha, the President’s office and state assemblies for ratification), Parliament will have to vote in two further bills to make GST a reality.

Beyond the legislative workload, Indian administrators and businesses will need to do their homework before this reality sets in. There are approximately 140 countries in the world that have introduced GST (also called VAT, or Value Added Tax), and there are manifold lessons to be drawn from their respective implementations.

Malaysia was the most recent country to implement GST in 2015, having announced its intention to do so in 2009. Malaysia’s experience highlights how inadequate preparation can hamstring the tax’s speedy implementation from the outset.[i]Malaysian businesses and tax authorities had a harrowing time adjusting to the new system, which was riddled with uncertainties and teething problems. The Malaysian government had to contend with street protests by small businesses and traders who were confused by the new system—whether in calculating the correct value-added rates, or in seeking tax credit refunds. Unsurprisingly, opposition political parties found it opportune to fish in these troubled waters, adding to the government’s mounting operational woes.[ii]

There was another layer of complexity. Malaysia had a multiple GST rate structure, much like the one proposed in India. A 6% GST (among the lowest in the world) was introduced, with some essential goods exempted and some goods attracting a zero rate i.e they were not exempt and could be taxed later. India too has proposed a multi-tiered structure, which will be finalised by the GST Council whenever it is set up.

Two clear lessons emerge from the Malaysian experience. Under pressure to launch GST as soon as possible, the Indian government must resist temptations to truncate the implementation process, which will include the training of tax officers and business executives. A presentation by revenue secretary Hasmukh Adhia estimates that 60,000 tax officials in both central and state governments will need to be trained.[iii] GST is a tectonic shift in the indirect tax architecture: the point of taxation shifts from producers to consumers, requiring a significant reorientation in philosophy and perspective. This overhaul cannot be completed unless the technology backbone is in place and all the relevant economic agents are registered. That alone is a mammoth task. There should, therefore, be no compulsion to implement GST by April 2017 if either the system is not fully tested or all the pieces are not firmly in place.

A related issue almost tripped up Malaysia’s GST experiment: the timely payment of input tax credit refunds.[iv] Unless the necessary technology infrastructure is installed, it can take months to refund tax credits, thereby creating cash flow problems for all links in a supply chain. This can easily convert GST supporters into detractors. Delaying tax credit refunds leads to protracted litigation and provides perverse incentives for the supply chain to stay outside of the organised system.

A second set of lessons can be drawn from Singapore. The city-state introduced GST in 1994 but witnessed a sharp rise in inflation soon after its introduction, mirroring the experience of many other countries.[v] Although inflation rates tend to moderate after a couple of years, the Indian government must be prepared for an initial surge because of India’s unique supply-side pressures, which tend to firmly embed inflationary expectations in households and businesses. India can consider what many countries did: initiate anti-profiteering measures at the retail level to protect consumers from price gouging.

Subsequently, the Singapore government faced other predicaments, like t the need to increase GST rates without stoking inflationary pressures. Eventually Singapore did increase GST rates (from 3% in 1994 to 7% currently), but simultaneously cut income tax rates (both at the individual and corporate levels) and accelerated the delivery of welfare benefits to lower income sections.[vi] While GST is efficient, it can also be regressive, especially for low income workers or pensioners. The Indian government therefore needs to be cognisant of this, and act cautiously.

The final set of lessons come from Canada, which introduced GST in 1991 amidst great internal conflict and disagreement. In fact, at the tax’s introduction, three provinces–Alberta, Ontario and British Columbia–even sued the federal government for violating constitutional agreements and limits. But over the years, Canada has pioneered a unique system that allows for three different models to co-exist.[vii] [viii]For example, Quebec is permitted to administer its own value-added tax alongside a federal GST. Quebec is responsible for all tax administration in the state, independently determining its tax base, independently fixing the state VAT rate, and even remitting federal GST collected in the state to the central government for a fee.

Compared to Canada, India has been able to forge a broad consensus among most states through a process of negotiation and compromises. The only point of disagreement remains the GST rate, which has been entrusted to the GST Council. This may lead to intense political manoeuvring with demands for special status or special rates. Tamil Nadu has already expressed its dissatisfaction with GST.

These examples clearly illustrate that the GST battle has barely begun: there are many mountains to climb, and multiple fires to extinguish along the way. The process of bipartisan consultation and consensus-building with states and various stakeholders must continue to make GST a cornerstone of successful and sustainable fiscal federalism.

This feature was exclusively written for Gateway House: Indian Council on Global Relations. You can also read it here.

References

[i] Pachisia, Vivek; Lessons from countries that have implemented goods and services tax; Financial Express; July 28, 2016;http://www.financialexpress.com/economy/gst-lessons-from-countries-that-have-implemented-the-goods-and-services-tax/331289/

[ii] Dey, Sudipto; Some Lessons From Malaysia That India Can Use; Business Standard; New Delhi; June 13, 2015; http://www.business-standard.com/article/economy-policy/gst-some-lessons-from-malaysia-that-india-can-use-115061300748_1.html

[iii] Adhia, Hasmukh; Goods and Services Tax: Next Steps; Department of Revenue, Ministry of Finance, Government of India; New Delhi; August 4, 2016;http://finmin.nic.in/press_room/2016/GST_nextstep_04082016.pdf

[iv] Beh, Yvonne & Tan Yi Lin; GST In Malaysia: One Year On; Wong and Partners; April 2016;http://www.wongpartners.com/files/Uploads/Documents/Type%202/WP/al_kulalumpur_gstmalaysia_apr16.pdf

[v] Ilias, Suhaimi with Zamros Dzulkafli, Ramesh Lankanathan and William Poh; Malaysia: GST- Early Impact Assessment; Maybank KimEng; April 2015;http://info.maybank2u.com.sg/pdf/investment-insurance/misc/misc-15-04-15-3.pdf

[vi] Singapore Government; How Is the Government Helping to Mitigate Inflation in Singapore; December 14, 2012; https://www.gov.sg/factually/content/how-is-the-government-helping-to-mitigate-inflation-in-singapore

[vii] Kumar, Sanjay with ML Sukhpal, Sandeep Rawal, Ashok Kr Pandey, Samar Nanda; Policy Paper on Role of Central Board of Excise and Customs in GST; National Academy of Customs, Excise and Narcotics;http://nacen.gov.in/inspire/uploads/downloads/569887ea212d1.pdf

[viii] Sharma, Radheshyam with JK Simte, MK Sarangi, KGVN Surya Teja, Sydney D’Silva and Manish Thapliyal; How to achieve administrative harmony between centre and states in the GST regime; National Academy of Customs, Excise and Narcotics; January 6, 2016;http://nacen.gov.in/inspire/uploads/downloads/56989a961d524.pdf

Security Cover As Status Symbol

It's admittedly weird. But, for many Indians, the level of security provided by the state is a prestige issue, to be worn like a badge of honour.

The Minister of State for Home Affairs, Haribhai Parathibhai Chaudhary, in a written reply to a question by Om Birla in Lok Sabha on Wednesday, July 22, 2014, gave details of people provided varying levels of security by the Central government. Here are the details provided by the minister:

“Z+” category – 31 

“Z” category – 77 

“Y” category – 136 

“X” category – 31 

Total – 275 

I feel that the number of people provided "Z+" cover at 31 seems to be quite high. I wish the government discloses who these people are and places its "assessment-of-threat" in the public space. I don't want to sound too indelicate, nor question the security cover provided to the President, the Vice-President or the Prime Minister; but it's my gut feeling that many have been provided "Z+" as a mark of honour, to provide them with a higher perch on the slippery social totem pole. 

People's representatives: Former Bihar chief minister Lalu Prasad Yadav (above) and former Uttar Pradesh chief minister Mayawati; (pix courtesy Reuters & Livemint) 

In recent times, Manohar Bhagwat, chief of Rashtriya Swayamsevak Sangh (with the official title of "Sarsanghchalak"), was provided "Z+" cover based on an fresh risk assessment. 

Ordinarily, "law and order" is a state subject, according to the federalism formula provided in the Constitution. But, the Centre also makes its own assessment and also provides security cover, based on "...assessment of threat to some individuals. The security provided is subject to periodic review, based on which security is continued/ withdrawn/ downgraded/upgraded. Thus the number of protected in the Central List varies from time to time."

And, the cost? This what the home minister's statement in Lok Sabha said, "...(it) is difficult to determine precisely as it would include salary and allowances to security personnel, communication, transport vehicles etc. which are acco
unted for under respective budget heads of different security agencies, including State Government agencies, involved in providing security cover. Such details are not compiled centrally and so cannot be provided." 

The details can be accessed here: http://pib.nic.in/newsite/PrintRelease.aspx?relid=123481

Two Big Bs -- Budget & Babu

Now that the media dust is beginning to settle on the Budget, here are some random thoughts and observations.

• The sleight of hand on Fringe Benefit Tax sucks. Making a grand announcement in Parliament (“I propose to abolish Fringe Benefit Tax”) while slipping in a proposal through the Explanatory Memorandum (to shift the burden to employees) not only stinks but reeks of traditional Congress behaviour – double standards and hypocrisy. It is also symptomatic of the party’s historical political culture. One would have expected the Ministry and the Finance Minister to be a bit more transparent. If this is how the government of the day behaves – surreptitiously, hiding behind opaque deals while making pious announcements in Lok Sabha – then one wonders what kind of example they’re setting.
• The market has come under heavy flak, and rightly so. It overplayed its hand and came up short. But, the market never seems to learn – this is a kind of behavourial pattern that keeps repeating itself. Many institutions published reports stating that the government was unlikely to accelerate its reforms programme from 0 mph to 90 mph in just a month after getting elected. And, that sounded pretty logical. But, markets never leave anything to chance – what in case Pranab-babu has a change of heart? What if Rahul-baba weighs in? Buy now or repent later. Interestingly, it may be instructive to read some of the Budget reports published by the broking houses – both foreign and domestic – the next day. Almost all of them have taken this holier-than-thou attitude and have roundly criticised the market for over-reacting. If everybody in the market is criticising everybody else, then who – in the name of the sweet lord -- sold? Somebody’s gotta come clean soon.

• Some governance rules never change. When not in favour of fast-tracking a proposal or an idea, set up a committee. Pranab-babu has announced a huge number of committees in his budget speech. Mocha Master’s pick from the many committees announced – an expert group “to advise on a viable and sustainable system of pricing petroleum products”. Which means: free pricing in petroleum products is unlikely till the Maharashtra Assembly polls next year.

• And, finally, this is what a friend and former colleague, who now lives in Hyderabad, had to say about the Budget: “Pranabda was doing more than just sniffling behind his hanky...he was playing hanky-panky..!”