One of the key aspects in global economic history that reflect a shift from a feudal economy to a modern one is the shift in focus of the revenue structure of a government from land-based taxes to commerce and trade based revenues. The Goods and Sales Tax (GST)policy in Indiais one such step that will certainly be recounted as one of the most ambitious leaps forward in the economic history of modern India. Another major Asian economy – that of the UAE is also on the same developmental direction as it ponders on promulgating VAT which is a close cousin of the GST in India. In India, indeed, this step, if taken, will be all the more momentous as it shall involve nothing less than the amendment of the Constitution itself.
Beginning in 1960 when a single nation started out with a common Value Added Tax structure, by 2014 such a method of tax collection became a system of choicefor 164 nations for more reasons than one, which led Indiaas well asthe Gulf Cooperation Council (GCC) states to begin its initiative to reform its tax policies. The Task Force on implementation of the Fiscal Responsibility and Budget Management Act, 2003, (Kelkar Committee) conceived GST in India. On formation of the new government in 2014, the GST Bill was revised as Constitution (122nd Amendment) Bill, 2014 and sought to provide for an umbrella tax replacing the existing system of a plethora of taxes on production, sales and services (excise, service, VAT, Central Sales Tax,Octroi, entertainment tax, luxury tax, purchase tax etc.).In similar spate, in the early 1990s, GCC ministers began studying the feasibility of introducing VAT and corporate tax as part of their economic reforms and the UAE now looks ahead to implement VAT beginning 2018.
While there is still time for the tax regime so new to our Asian economies, to be promulgated, it would not be a futile exercise to cautiously weigh its different aspects with a view to streamline it as much as possible before taking such a significant decision that would mark the fate of our economies for decades to follow. As they say, Abundanscautelanon nocet(abundant caution does no harm).
In my opinion, the success of any tax policy can be ensured if it is tested against the threefold parameters of Clarity, Efficiency and Seamlessness (CES). A tax policy in order to be successful needs to be firstlyclearly defined. Clarity regarding the purview of the tax could be enhanced by defining the degree of participation of the various stakeholders such as the different state governments, industries and people in the new tax regime. For example, there have been arguments against including the banking services under the new tax regime in India since it will increase the cost of doing business in the nation thereby rendering it uncompetitive in the global market. While there are similar considerations for the UAE economy as the VAT will prove a slightly greater burden on big ticket international shoppers and consumers, who contribute significantly to the UAE economy, yet the challenges in front of India differ greatly in magnitude.
In the high income GCC states, economic planners have examined the virtues of placing higher VAT levels on luxury goods rather than those used by low and middle-income citizens. This is unlike what the pundits profess of the GST in India, where small businesses and the middle class is predicted to bear the greatest tax brunt. One has to be clear regarding the stakes of the respective economic sections and the impact of any tax laws over them.
Moreover, in the European Union, where VAT has been around for quite sometime now, as expressed in a 2014 Green Paper of the European Commission on the future of VAT, there are “numerous shortcomings in the current VAT system which create obstacles to the Internal Market, cause burdens for businesses and prevent Member States from benefitting from the true potential of this tax”. This paper also insinuates towards the fact that even under this system, owing to its complexities, there may be new room created for fraudulent practices to take place. These aspects cannot be overlooked while considering this tax policy especially in Asian economies such as the UAE and India as it cannot be denied that such complexities come as part and parcel of a unified tax regime.
The second pillar ofEfficiency – in the context of revenue collection refers to more revenue for the government with as less financial burden on the taxpayer as possible.In the UAE, the GCC had suggested to delay VAT till the inflation in the economy is brought into control since such taxes tend to exacerbate inflationary trends, and when between 2008 and 2009 inflation dropped sharply in countries such as the UAE, Kuwait, Qatar and Oman, only then renewed efforts of implementing VAT gained force. However, on the other hand, in India, after a brief dip in inflation in 2014, the inflation has been on the riseand is within bounds so long as oil prices remain low. If compared with the 3.17% rate in UAE, India’s accelerating inflation at a current rate of 6% (approx.) does not make it a fertile ground for the implementation of such a scheme as GST.The proposed GST rate of above 25% will hit the roof of inflation and will increase the tax revenue by about 0.2 per cent while GDP growth could go up by 0.9-1.7 per cent as per National Council of Applied Economic Research (2014). On the other hand, the VAT in the UAE at a planned rate of 3-5%, stands to earn estimated revenues of between Dh10 billion and Dh12 billion (0.005% of UAE GDP) in the first year of its application as per Younis Haji Al Khoori, Undersecretary at the Ministry of Finance, UAE.
The above figures simply point towards the contradiction that while India seems to gain more from the new tax regime (in GDP terms), it does not seem to be a fertile ground for it (due to high inflation). On the other hand, while UAE seems to be a fertile ground for the new tax regime, it seems to gain only marginally from this new policy and certainly not enough to offset the declining oil prices. Hence, this policyis posed in from of our economies as an incongruous conundrum yet to be solved.
The last pillar of seamlessness firstly means streamlining of processes such as a refunding and credit clearing mechanisms that prevent breakages in the credit chain – aspects that will need to be ensured in practice through effective administration. Secondly, seamlessness also refers to the provision of benefits to all groups within the state, in a seamless manner. Some challenges may seem imminent in the GST policy. Inevitably, there will be Indian states that may incur losses due to the new system and therefore the government has finally approved compensation for revenue loss to States on account of GST to be provided for a definite period of 5 years, instead of ‘upto 5 years’ proposed in the original GST Constitution Amendment Bill.
This is when the earlier tax policy of Central Sales Tax (CST) in India, despite having extoled as a panacea for the dwindling Gross Domestic Production (GDP) resulted in a huge cascading effect wherein multiplicity of taxes and tax base being fragmented between Centre and States resulted in a byzantine scheme of interconnected legislations adversely effecting growth in GDP. With respect to states, the CST compensation promised to be paid regularly has never been kept. For instance, the state of Telanganain India is to get about INR 6000 cr. (USD 872 million) overdue for past 2 years out of CST proceeds.One has to be doubly cautious before taking a further step as there is still a huge gulf of understanding between the government and the people as to how risky aspects such as dispute resolution would be handled by the proposed GST council and that too in a timely manner. These issues are indeed universal features of the common tax regime throughout the world.
Before implementing such a policy in the gulf countries and India, the Asian economists will have to ponder over the fact as to whether such a tax regime is indeed the need of the hour or part of the effort to ride the global bandwagon. If the answers of the policy formation communities in both these regions leans towards the second reason, then it is only prudent to think, rethink and think again on these key aspects, before coming to a decision that would fundamentally alter the structure of our economies.