Prepare urban, rural bodies for GST compliance: Mukul Asher–Business Standard–28.06.2017

Mukul G Asher, professorial fellow at the Lee Kuan Yew School of Public Policy at the National University of Singapore, and chairman, 5th State Finance Commission Haryana, has set up base in Delhi until July to get a first-hand feel of the switchover to the new indirect tax regime. Asher discusses with Sudipto Dey the public policy implications of the reform, the need for state governments to keep a close tab on supply of essential commodities and assess the impact on finances of urban and local bodies. Edited excerpts:

GST reform is a landmark initiative. It is remarkable that a consensus have been evolved among the Union government and 29 States and 7 Union Territories on its design, structure, and implementing regulations. None of the stakeholders, including industry and government, will be fully ready by July 1, 2017.

The global experience suggests that for any major public policy reform — and GST qualifies for such a label — there is a momentum and timing which if missed, could delay the reform unduly. The sense is that the time for implementing GST in India is now, and this occasion should not be missed. There will be challenges in transiting to the GST regime, but in my view they are manageable. GST requires a mind-set change. Those with the ‘business as usual’ attitude and resistance to digital technology-enabled tax administration and compliance will find adjusting to the GST regime more challenging.

The international experience suggests that in countries with relatively sound macroeconomic management – as is indeed the case for India – introduction of GST (or VAT), or raising the rate of existing GST (VAT) increases cost of living by roughly the same percentage points as the increase in the tax rate over 6 to 12 month period. But it leaves inflation rate essentially unchanged.

The one-time increase in cost of living however does affect household welfare. To address it, most countries, for example Malaysia, undertake initiatives designed to keep prices of essential commodities for households under check by ensuring sufficient supplies and by partly compensating households through a GST rebate for a limited period  or through personal income tax credit for a limited period. Moral suasion and public shaming of those unduly increasing prices are also used.

Anti-profiteering provisions are not common. Such provisions should be used only when there is compelling commercial evidence. In a dynamic market environment there are many subtle ways to raise cost of purchase to the buyers which do not necessarily get reflected in a stated market price. These provisions also distract from more important task of focusing on voluntary compliance, essential to broaden the tax base and generate revenue in an equitable and efficient manner.

The local monopoly power manifested in pricing power for essential commodities is a challenge, particularly in India’s multi-speed economy and its federal polity. It would however be useful if the State authorities ensure that supply of essential commodities is sufficient to meet demand. Second, assess and then communicate which items in household’s consumption basket would be cheaper and encourage substitution to cheaper options through effective communication to its residents. Most effective way to curb monopoly power is to help increase price sensitivity by the consumers, what economists call high price elasticity of demand. Third, where necessary introduce short-term assistance to help households transit to the GST regime.

The urban and rural bodies will be impacted by the GST in various ways. First, there will be some goods, services and assets which they purchase will be subjected to GST. The input GST could qualify for input tax credit. So, urban and rural bodies will need to prepare for GST compliance. Finance and tax departments of a State are appropriate agencies to prepare them. This will improve uniformity, access to GST expertise and assist learning and capacity building. Second, the role of entertainment tax, permitted to be levied by urban and rural bodies, will need to be examined by each State.

The State Finance Commissions (SFCs) will need to be sensitive to the implications of GST in their work plan and recommendations. In addition to taking into account impact on urban and urban bodies, the State compensation formula for GST (essentially guaranteed 14 percent annual revenue increase revenue GST for 2015-16) will also need to be taken into account in their revenue projections. In some States where devolution of funds to urban and rural bodies is on the basis of certain taxes, such as VAT, rethinking on the devolution criteria, perhaps to broader basis, such as State’s own tax revenue, may need to be considered.