Government catches the bull by its horns with Goods and Services Tax (GST), and Demonetization

To bolster its economic reforms program, Indian Government exhibited its carrot and stick policy through its tax-reforming GST and monetary-reforming demonetization of high value currency. Kelkar task Force first mooted GST in 2003, which took 10 more years to pass as the 122nd Constitution Amendment Bill in Dec 2014. While the passage of GST rollout, until its implementation from 01 Apr ’17, is a 14-year journey through three successive governments, the present regime enforced demonetization in an overnight move.
Currently, 160 countries in the world have implemented VAT/GST with worldwide highest rate of 27% in Hungary, lowest 5% in Canada along with some other countries and an average rate of 17.5%. However, its implementation in India requires methodical approach owing to the complexities of structure and diversities of its 32 players (29 states, 2 UTs with legislatures and central government). Through the GST, Government proposes to levy a single indirect tax on supply of goods and services, right from manufacturer to consumer with subsumption of several central and state taxes, viz. excise duty, VAT, entry and octroi tax, service tax, luxury tax and sales tax.  To oversee and administer the GST, it formed the GST Council, a powerful federal body under the chair of the Union Finance Minister, that will take decisions based on three-fourths majority of votes cast, of which, Centre has one-third and States have two-third votes.
In a departure from international practice of having one rate of tax for all goods and services, the GST Council recently agreed to reduce existing 15 to 20 tax slabs to just four to assuage all sections of society and various stakeholders. It also agreed to zero-rate for nearly half the items in Consumer Price Index, thus including them in the GST chain without burdening the consumer. The table below enumerates the tax slabs:

5%3 TO 9%Daily use items like edible oils, spices, tea and coffee
12%9 to 15%Computers and processed foods
18%15 to 21%Soap and oil. All services likely in this slab.
28%21%All white goods like TV, washing machine, refrigerator etc
Additional CessNilSome sin and luxury goods from 28% GST slab like luxury cars, tobacco and fizzy drinks.
 The GST is non-inflationary since it removes currently imposed cascading effect of taxes at various levels. It will be simple and easy to administer. However, its compliance and implementation will require comprehensive digitization and robust IT system, wherein, all taxpayer services e.g. registrations, returns, payments will be online. It will ensure better control on tax leakages to mop up higher tax credits and improve revenue efficiency. Further, it will bring transparency in tax regime for the consumer. Conversely, most services, if included in 18% slab, will become costlier by almost 3%. Another salient drawback of the system is that the GST Council can only recommend a model law, but the states are free to go their own way. Technically speaking, the authorities have created five slabs, including zero-rate slab, to retain their power of denial/consent to move goods to lower tax slab, thus encouraging lobbying by manufacturer associations.
The other major reformist decision of the Government was to weed out black money from the economy through overnight demonetization of high value currency denomination of Rs 1000 and 500 that amounted to Rs 14.95 Lakh crore and totaled nearly 25% of all currency. As per World Bank estimates, the Indian parallel or shadow economy stands at 25% of GDP. Lot of long-term positives will emerge from this singular decision to move India towards cashless economy. It strengthens national security by ending circulation of large volume of counterfeit currency and ‘unaccounted money’, which in turn chokes funding for arms smuggling, espionage and terrorists. It will correct land and property prices by eliminating 'Hawala' transactions and combating graft. New opportunities will open up for poor and middle class since it will bring real estate and healthcare within their reach. As the size of parallel economy shrinks, tax base will automatically widen, Government will earn more revenue through higher tax collections, and inflation will come down. Jewelers, delivered a body blow earlier through imposition of mandatory requirement of PAN card for transaction over Rs 2 Lakh, now face a double whammy. The near-term ramifications are that political parties will not have ‘unaccounted cash’ to spend in the forthcoming assembly polls and drying up liquidity will increase demand of working capital credit. The challenge for the bankers is to infuse 3.5 billion new notes into the system by 30 Nov while the citizenry make a beeline and mob them to return old currency.
While the government has done an OROP with GST by instituting ‘one tax, many slabs’, rather than a single or at least a narrow-band tax rate, its surgical strike of demonetization is certainly a masterstroke against black marketers. Government’s balanced approach, amidst unrealistic demand of economists for a flawless GST, will give optimum benefit to all stakeholders - manufacturers, service providers and consumers. A three point agenda can pave the way forward to take these reforms to their logical conclusion. First, bring real estate under GST to seek tax credit and establish audit trail. Second, improve efficacy of welfare schemes through additional revenue generated by GST and demonetization. Last, but not the least, poverty alleviation by removal of flagrantly dysfunctional subsidy distribution that breeds malpractices and introduction of 'universal basic income' i.e. unconditional cash transfer to all families through banking system. This implies challenging time ahead for policy makers and implementers to work out final classification list of GST and ensure smooth implementation of demonetization – God is in the detail.