Experience is the name the wise give to their mistakes. Through lessons learned from Modvat and later from VAT (which are also based on the same concept of tax credit, as in GST), it would be simple, even now, to gauge what GST would bring about.
CAG audits on Modvat revealed huge evasion, while one of the Collectorates had listed 13 ways that companies were taking wrong credits. The CII had also reported about the failure of Modvat. The VAT generated rampant evasion to the extent of even 50% in 11 of the 23 States, where audits were carried out in 2010. Other undetected wrongdoings and many unrevealed cases of harassment would add further to this sorry state of affairs.
RV’s advice
Anticipating all these, well-meaning experts had already forewarned about complex multipoint levies with input tax credit at each stage, as in Modvat, VAT and GST. The then President, Mr. R. Venkataraman (also former Finance Minister) had stated, even in 1986, that for our country, only single-point taxation would be necessary. To those who still advocate GST , one may ask, “Then, why was VAT of 1995 in Maharashtra abandoned soon and why was Modvat christened as Madvat?”
GST would actually bring forth even greater problems. These have already begun to show as tips of a large iceberg — business climate being affected badly, fall in exports and other difficulties, including conditions in complex notifications (such as GST notification 41/2017), which cannot even practically be fulfilled. For July, on transitional credit refund claims alone, as much as ₹65,000 crore had been claimed. Highly questionable, it is also practically impossible to check every claim. Unbridled ‘sophistication’ and hi-tech requirements only make things worse.
Besides, the need for countless documents, returns, formats, GST-1, GST-2, certified copies, subsidiary invoices etc., has prompted the Trade Confederation to term GST ‘a nightmare’.
The root of the problem
It would only be clear that the way-out is not through merely lowering tax rates.
Things will not ‘settle down’, but would only go from bad to worse. With regard to VAT, the protests alone came down after some time, as many tax payers endured what could not be cured; while many learned to become street-smart to outsmart this ghastly tax regime, through collusion with tax officials and evading tax, through remaining within the exemption limit. They were also freed of audits and did not have to answer show-cause notices. Ethics and tax compliance were sacrificed for sheer survival.
The above also explains why, in the GST regime, many opt for exemption through fragmenting their business, and persuading their suppliers and buyers to do also so. For, if they opt to pay duty under composition scheme, there would be a break in the GST chain.
Same is the case with service providers, who too would choose not to pay service tax through splitting their units or by undercutting the value of their clearances. Thus, unwittingly though, they would also pay far lesser income tax than what they would willingly have done otherwise.
A very important reason for the price rise, which has constantly followed Modvat, VAT and also the present GST, is the inherent uncertainty. Faced with the prospects of having to pay huge amounts demanded after protracted and costly litigation, many would choose to increase prices for obtaining greater profits, to be kept as reserve. This uncertainty is also revealed in the ‘disclaimer’ in several FAQs, stating that replies are only for guidance and do not hold any legal validity.
The grey areas are so vast and deep that even higher forums of appeal cannot judge with any certainty, let alone FAQ answers or ‘Suvidha providers, GST kendras’ etc., conceived of in this drama of pretence and make-believe.
All of the above underlines the truth that evasion and aberrations can never be checked by making statute and procedures elaborate and stringent. The arbitrariness, which these would generate, only serve to promote a far stronger culture of ‘permit raj’ and greater loopholes.
The solution lies through single-point GST levy, with simple statute, procedures and documentation and a tariff with broad-based headings for goods and taxing only organised services. Adam Smith stipulated four ‘canons’ for a good taxation system — equality, certainty, convenience and economy.
Guided by these and also by our own well-meaning experts, a truly ‘Good and Simple Tax’ should replace the present one, which, indeed, is highly grotesque and cruelly ‘sophisticated’!
(The author was in IRS as Deputy Collector, Customs & Central excise. His email id is: kvyoga@gmail.com)
