How much Good and Simple is the present the GST?

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When the clock struck 12 on 30 June 2017, India stepped into long awaited One Nation One Market through implementation of Goods and Services Tax (GST). GST came into effect by 101^st Constitutional Amendment Act following the passage of 122^nd Constitutional Amendment Bill. It is hailed as a Good and Simple Tax because of emphasis on minimising the cascading effects of tax, rationalising tax structures, improving tax compliance and thus aiming at improving the ease of doing business.

Having said that the 101^st amendment has undoubtedly opened a new chapter in India’s economic history, the present GST has certain drawbacks too. The shortcomings of GST can be broadly classified into complexity of tax structures, problem of tax compliances and technical glitches.

1)      Complexity of Tax Structures

GST was envisaged as a Good and Simple Tax but the present tax structure with five different rates and cesses is far away from being simple. There have been reports about how milk has been subjected to different rates. However, it merits attention that this problem is ought to occur in a country which is hostage to huge income inequality. Thus the trade-off is actually between having a good tax (which in my view is a tax which takes into consideration the impact of tax burden on different segments of the society) and a simple tax (which is to approach towards a unified tax rate as close as possible).

Given the fact that only about half of the Indian economy comes under the ambit of GST, the items subjected to GST have mostly been taxed stiffly. India has one of the highest tax rates in GST in the world. Further imposition of cesses goes against the principle of Value Added Taxation. Interestingly, the state finance ministers don’t have much objection to distorted tax structures and its repercussions on growth because of the Compensation Scheme. However, there is optimism that when the tax buoyancy improves the tax rates will be slashed.

2) Compliance Problem

The tax compliance has become major hurdle particularly for MSMEs. In the earlier tax regime, entities with a turnover of Rs1.5 crore per annum were exempted from payment of excise duty. That threshold has been lowered to Rs20 lakh for most of the states under GST. As these sectors are handicapped of the essential infrastructure required for tax compliance so they have to depend on intermediaries which add to their compliance cost.  Against this backdrop , the release of GST app after a week of its implementation can be called as a faulted start.

The delayed input tax credits have also affected working capital requirements of MSMEs  badly. The government had announced composition scheme for the tax payers (threshold limit 1.5 crore) but there are not much takers of this scheme because it is only for intra state supplies and input tax credits can’t be claimed by a dealer opting for this scheme.

3)      Technical glitches

IT is the backbone of GST. Industry has voiced concerns over the issues faced during matching invoices and other tax filing procedures.

The above limitations merit discussions but also taking into account that the government is constantly making efforts to take measures for improving the GST. Slashing of rates on 200 items in November 10 is a much appreciated move. The average shortfall of revenue has also narrowed. The improved ratings in the Ease of doing business and Moody’s ratings allude to the fact that in the long run India’s economy will benefit from this reform. However, going by Keynes statement that in the long run we are all dead, a good policy requires both short term and long term consideration. The government could have introduced GST in phases, by initially targeting companies and then taxing MSMEs. This would have given breathing time to MSMEs to equip themselves with the necessary infrastructure before this major overhaul. The government is mulling direct tax reforms. The government has already set up a task force to draft a new direct tax legislation. Hope more wisdom will be reflected while implementing Direct Tax Reforms.

What is happening with India's telcos?

Presently the telcos are neck deep in debt. The telecom industry’s debt to banks is estimated at  4 lakh crores. The telcos are demanding for a stimulus in this sector as in their view the present situation is a result of unfavorable government policies and due to a new entrant in this sector. The ministry of telecommunications has said that the solution for aiding this sector would have to be done at the policy level to keep sector alive.

Telcos argue that the sector is too critical to be allowed to fail. In 1998-99 the NDA government bailed out telecom operators. At that time the mad bidding for voice prices was the reason for the crisis in the sector. However, the bailout was followed by a boom. But the question arises what is government bailing out -  A wrong business decision or its wrong decision?

According to telcos the high astronomical prices during the rebidding of spectrum in 2014 was a result of faulty government policies. The revenue share model, present GST rates, and the high spectrum fees are some of the major problems cited by telcos.

However, it should also be noted that the telecom companies in India were not investing in the network. They were investing in infrastructure and thus increasing their capital expenditure leading to more debts. Globally the infrastructure expenditure is incurred by the real estate providers. As the companies were not investing in technology it got a big jolt when the new entrant came with unmatched data services.

The telcos are now considering mergers as a solution to alleviate their present woes. In India, there are many telecom operators. There is no country around the world having so many operators, so possibly the merger can be a good step. But it should also be noted that two bad telecom operator can’t give a good telecom operator. The merger between Reliance and Aircel didn’t work because banks did not agree to the merger. This is because the merged entity would result in a larger write-off which will wipe out Rs. 25000 crore from the banks’ balance sheet.

The solution lies in both government and telcos agreeing to take steps to sustain this sector. The telcos need to divest from the business which ain’t considered productive. The government can act as a facilitator by easing the procedures for mergers. Also, the telcos should start investing in new technologies and upgrading networks constantly.

Banking Regulation (Amendment) Bill

The Rajya Sabha has passed the Banking Regulation (Amendment ), Bill. The Bill seeks to replace the Banking Regulation (Amendment) Ordinance , 2017 and amend Banking Regulation Act, 1949. It amends the provisions related to stressed assets.

The Bill empowers the RBI to direct banks to initiate proceedings under the Insolvency and Bankruptcy Code, 2016. RBI’s internal advisory committee has identified 12 large stressed cases for proceedings.

While the humongous problem of NPAs call for a strong institutional framework, there have been questions related to the recent powers vested to RBI on two grounds –

1)      Whether the RBI required such special powers or such powers were already conferred to it under Banking Regulation Act 1949?

2)      Is it advisable to confer RBI with additional powers?

Section 35A of the 1949 Act allowed the RBI to issue binding directions to banks in ‘public interest’ or where the functioning of a bank is detrimental to its interests, among others. The question is whether a high level of NPAs qualifies as ‘public interest’ or ‘detrimental to the interests of the banking company' and therefore allows the RBI to use the powers under Section 35 A to direct banks to initiate recovery of proceedings under Insolvency and Bankruptcy Code.

The opponents of the Bill expressed concerns that focussing on such microeconomic issues might interfere with RBI’s role of framing policies on macroeconomic issues. RBI, as a regulatory institution, is expected to frame broad guidelines, ensure the stability of the banking system and prevent risks to the financial system. As the resolution of stressed assets is a commercial decision so it should be left to the banks. The RBI data shows that about 88 % of the NPAs are in the Public Sector. As the government is the majority shareholder in these banks so it had the authority of initiating proceedings.

The proponents argue that resolving of NPAs is an important task as it has serious repercussions on the economy. It is also argued that RBI’s mandate to initiate proceedings will allay fears of future investigations. The Economic Survey 2016 – 17 mentions that inherent threat of punishments is one of the major reasons due to which bankers delay the decisions of writing off the loans. The new powers will also boost the investor’s confidence.

Though the menace of NPA is because of many factors (giving infrastructure loans, court proceedings on 2G scam and coal allocations, land acquisition etc), it cannot be denied that misgovernance was the major factor. The present bill has enlarged the functions of RBI and it is hoped that more steps are taken in the direction of freeing public sector banks from political interference.

Source : PRS Legislative Research

Transparency in Judicial appointments

The Supreme Court has recently taken a historic decision to disclose the reasons in favour of recommendations by the collegium system with regard to judges. The recent transfer of Justice Jayant M Patel might have triggered this recent move.

 After the Second Judges Case (1993) the Supreme Court reserved the autonomy in the selection of judges as the judgement held that “consultation” of the President with the Chief Justice of India in matters of appointment meant “concurrence”. Though in the Third Judge case (1987) SC opined that consultation meant consultation of the plurality of judges, the appointments had always remained debatable due to the secrecy maintained by the collegium. It was also a bone of contention between the judiciary and legislature.

The collegium note uploaded online gives a brief summary of the professional performances of the candidates, including a rating on their judgements. Suhrith Parthasarthy , an advocate in Madras High Court , in his article “Collegium and Transparency”, which appeared in The Hindu dated 1 November 2017, observed how the present system still falls short of achieving the goal of transparency.

Though a certain degree of discreetness is required as in many cases the reasons might pertain to sitting judges, it is important to strike the right balance between disclosure and discreetness.

Nevertheless, this step albeit small is a step in the right direction and it is hoped that Supreme Court will introduce all other reforms gradually, disclosure under RTI being the foremost.