Now that the constitutional amendment enabling the goods and services tax has been passed by Parliament, the government expects to have the legislation in place by April 2017. This assumes the resolution of other issues, such as getting the bill passed by the state legislatures, the setting up of the Goods and Services Tax Council defining the tax’s powers, deciding the taxes on petrol and alcohol, the division between states and the Centre and so on. The GST replaces indirect taxes of the Centre and the states and is intended to be revenue neutral. It is a value-added tax and so there is need for a comprehensive information system with information technology concerning thousands of tax-payers. But it will significantly improve the ease of doing business, make India a true common market with the same price for the same product all over India, and should reduce “tax terrorism”, that is, harassment by tax officials.
During my corporate career from 1957 to 1985, I was responsible for marketing several consumer and other products all over India. One had to know the complex procedures and rates of indirect taxes in India, levied by local authorities, state governments and the Centre. Imported goods were charged custom duties on entry and were not an issue since they were included in the price charged by the manufacturer or importer. Most manufactured goods bore Central excise duties that had to be paid before the goods left the factory. These duties varied between products and the size of the manufacturing units. Both Central and state governments could levy excise duties on petrol and alcohol. These duties are not difficult to calculate. There could be evasion, especially in case of alcohol-based products or others, in which there is liquid content, on account of evaporation loss. This may not be possible when they are included in the GST.
When the goods left the factory, they had to cross state government borders. Many trucks did not have interstate transit licences and had to pay levies at each state border. In addition, each state levied sales taxes at varying rates on different products. The lorry had to stop at the state borders and what was brought into the state had to be certified. If only a portion was to be sold in the state, what was going onward to other states was also certified. One expects that only trucks with interstate permits will be allowed to carry goods across state borders.
In the 1950s, when I started my marketing and sales career, the network of rural roads was limited. There were few lorry routes. There were no nationally marketed products that had significant rural or even small-town consumption. Most sales were to urban areas.
Goods were packed in heavy wooden boxes. A trader in a small town or village, who wanted to stock such products, had to go to the nearest large town and buy from the local wholesaler. If he had a fairly large order, he might place it with the manufacturer. But the goods would only be delivered at the nearest town with a railway station. He had to collect the goods and take them to his location. There were few bank branches. In Hindustan Lever, where I worked then, we gave such traders from non-banked locations a “bank negotiation allowance” to go and clear the documents and collect the goods. The world changed over the years. Strong cardboard boxes replaced wooden boxes for packing. The rural road network expanded and many villages had lorries delivering them goods. Transportation by road replaced transportation by rail. Bank branches increased. Today, the rural roads programme is an important part of government policies. Millions of rural Indians now have bank accounts. Post offices are to become bank branches for payments. The GST will use this new infrastructure to supply goods to the remotest parts of India.
Sales tax could be levied at different points – at the first point of sale or at the final point; at multiple points in which the product is traded; as VAT, when only the value added at each point of sale is taxed. State governments preferred the other options to the single-point levy, which, of course, is simpler. The first-point levy is the least remunerative to the state, while tax at the last point and tax at each point of sale would give better revenues. However, the administration of the last two is complex, they harass the seller and are open to manipulation.
Apart from sales tax there are also the taxes by local bodies and municipalities. This local body tax, or octroi, on goods entering their territories is a cumbersome levy. The tax is collected at the point of entry and results in the carrier having to halt with the goods until the matter is settled. It is subject to massive corruption. Many authorities have tried to abolish it but were stopped by vested-interest groups, which make money out of such levies. However, except for Maharashtra, which now has the entry tax, the tax has been abolished everywhere. Further, it can be a significant source of revenue for local authorities, who have few tax options.
Thus products, before reaching the point of consumption, have paid import duty and Central excise duty at the factory. Sales tax is calculated at the point of levy. At the first point, the process is simple. The other points of levy are more complicated and require inspection of thousands of account books of traders. They are subject to corruption. Our federal Constitution gives states the power to claim property registration fees, tax alcoholic drinks and charge levy on motor vehicles. These fees are limited and not buoyant. Sales taxes are the opposite. States get a share of the direct taxes collected by the Centre, as determined every five years by the finance commission. But the Centre can avoid this sharing by levying special cesses that it does not have to share with the states. The GST is against the principle of federalism.
When each state government levies its own rate of tax, end product prices vary all over the country. India had thus missed the chance of being a true and large common market, to its detriment.
I experienced this when, in 1970, I led the launch of Chiclets chewing gum in India. My strategy was to target children aged between five and fourteen, for whom the price had to be in a single coin of 10 and 50 paise, for two or ten pellets. Single coins were more likely to be given to a pestering child by a parent. Because of the differing sales tax between states, we were required to have different factory invoice prices, which ensured adequate trade margins but gave the single coin end price. The strategy succeeded and the product sold very well.
The rationale behind having a single goods and services tax all over the country is to have one price for all consumers anywhere in India.
But state governments will no longer have the flexibility to vary sales tax rates according to their needs. They must have them confirmed by the GST Council.
A single nationwide GST would also reduce the harassment of tax-payers, make collection easier and almost certainly boost tax revenues, as evasion and corruption get reduced. When the GST becomes operational we will be marketing goods and services in an India where lightweight packing is in extensive use, a rural roads and lorry network is spread all over the country, there are direct roads to many villages (and more being built), millions of people with bank accounts and a more honest indirect tax collection system. My Indian markets of 60 years back have been transformed.
The author is former director-general, National Council of Applied Economic Research