Making GST less of a pain

GST (Goods and Services Tax) was conceived with the idea of simplifying Indian tax regime, subsume several types of taxes, avoiding multiple point taxation and bring about an end to the complex web of excise duty/sales tax procedures. But we the taxpayers should have known better. Indian bureaucracy is never known to simplify anything because it is the surest way of making themselves redundant and irrelevant. Things therefore need to be complex so that there is always a room for ambiguity and interpretation (the latter being the forte of bureaucrats of all hues). So we have ended up with a overly complex tax system which provides several loopholes for crooked people to hoodwink the government and bureaucrats to extract bribes. Also the prices which we were told will come down never did because the excess automatically ended up with the several middlemen between the producer and consumer.

After more than 2 years of implementing GST, the only people who have gained are the tax consultants, advisers and the tax accountants who alone can navigate the complex bureaucratic shoals. Both producers and consumers have had to pay the price of declining profitability due to higher compliance costs and higher price respectively.

Since the bureaucratic wisdom wants involvement of everyone in the GST procedures (on the premise that more players, more the bribes), the system requires tax to be collected at multiple levels with each level claiming a rebate in the form of tax credits. The credit system has given rise to bogus invoices to facilitate bogus claims. Though a few large scale crooks have been caught, there must be certainly several more who operate a similar scam on a less noticeable scale and slipping through the net.

It would have been better to collect the GST through as few a number of companies as possible instead of making it the responsibility of almost everyone who does some business or trade and this can only increase the bureaucratic oversight (which is ultimately what the bureaucrat needs, wants and desires).

The alternative would be a system which involves collection of tax only by the major players who are: the producers of finished goods, wholesale importers, marketing aggregators and providers of services. In this system, tax will be collected (and remitted) at a single point for each of the goods and services. The tax credit system will be done away with. I will explain this using an example of a car manufacturer. A car manufacturer buys components from OEMs and assembles and sells them. He incurs expenditure on consumables for the business and several services. The manufacturer will pay the tax for services and consumables (of which he is the end user) but not the components that go into the manufacturer of the finished product. The taxes he pays on this account will become a part of the manufacturing cost. Let us say that the ex factory cost comes to Rs 4 Lakhs per car (including the manufacturer's profit) and that the cost of marketing and distribution including the commissions is an additional 40% of this cost, he will calculate the GST for the total projected cost to the ultimate buyer with the tax rate fixed in such a way that the government gets the desired revenue which it would have otherwise got from the multi-level system. It is easier to ensure the collection of GST from a single point namely the manufacturer without any tax credit offset while the component manufacturers and distributer/retailers neither collect nor need to deposit GST to the government.

Similarly an importer will pay the customs (import) duties which will be added to the cost of the goods. GST will be charged on this cost plus the importer's profit, projected cost of marketing and retail commission. No taxes will be collected down the line.

A marketing aggregator whose supply chain is mainly MSMEs will add the GST to the purchase cost, operating cost and profits, and marketing/retailing costs while the MSMEs and retailers will not collect any GST.

In all these cases the MRP will be the cost on which GST is calculated plus the GST itself. Retailers may offer whatever discounts they can on this MRP.

I know that all those who have a vested interest in the present tax regime will come out with a lot of objections but they can all be solved with a little more application of mind than what has happened till date.

The government itself should focus on:
• Ensuring that the overall tax revenue of GST is not adversely impacted.
• Reducing the oversight due to reduction of tax collection points and thus reducing the cost of governance.
• Ensuring that the scope for scams which generate black money by both businessmen and civil servants is completely eliminated.
• Reducing the present financial pressure faced by MSMEs and OEMs who have to pay GST upfront while waiting endlessly for payment to be realised from their principals. more  

View all 21 comments Below 21 comments
Yes, GST was conceived with the idea of simplifying Indian tax regime, but inspite of regular reviews and modifications, it could not be liked by many business community. When the activity is starting from the time of manufacturing, why so many checks till it reaches the consumer ??? more  
Dear Shri Govind, I received your response. However, I do not where you have given clear suggestions? When giving POSITIVE suggestions, please give figures and specific terms. Best wishes more  
What I suggested is a different approach to the GST collection to reduce complexity (and not reduce the revenue). Pl see below. Rates can be reviewed based on the present tariffs and a mutually agreed formula to determine the downstream marketing costs + sellers' commissions.

The alternative would be a system which involves collection of tax only by the major players who are: the producers of finished goods, wholesale importers, marketing aggregators and providers of services. In this system, tax will be collected (and remitted) at a single point for each of the goods and services. The tax credit system will be done away with. I will explain this using an example of a car manufacturer. A car manufacturer buys components from OEMs and assembles and sells them. He incurs expenditure on consumables for the business and several services. The manufacturer will pay the tax for services and consumables (of which he is the end user) but not the components that go into the manufacturer of the finished product. The taxes he pays on this account will become a part of the manufacturing cost. Let us say that the ex factory cost comes to Rs 4 Lakhs per car (including the manufacturer's profit) and that the cost of marketing and distribution including the commissions is an additional 40% of this cost, he will calculate the GST for the total projected cost to the ultimate buyer with the tax rate fixed in such a way that the government gets the desired revenue which it would have otherwise got from the multi-level system. It is easier to ensure the collection of GST from a single point namely the manufacturer without any tax credit offset while the component manufacturers and distributer/retailers neither collect nor need to deposit GST to the government.

Similarly an importer will pay the customs (import) duties which will be added to the cost of the goods. GST will be charged on this cost plus the importer's profit, projected cost of marketing and retail commission. No taxes will be collected down the line.

A marketing aggregator whose supply chain is mainly MSMEs will add the GST to the purchase cost, operating cost and profits, and marketing/retailing costs while the MSMEs and retailers will not collect any GST.

In all these cases the MRP will be the cost on which GST is calculated plus the GST itself. Retailers may offer whatever discounts they can on this MRP. more  
To Mr Padam Law: I have given clear suggestions in this post. Hope you went through them. I expect that the Circle Managers who have access to the PM would take it forward. It will have more weight than coming from an ordinary apolitical person like me. And I do not claim to be any more intelligent than the next person. more  
Those who are opposing GST know the loopholes and problems faced by them. Use them intelligently to find out solutions. more  
Instead of simply criticising the GST, why don't the so-called intelligent people, write down, in detail, what they feel needs to be done and forward the same to the Finance Minister and Prime Minister? I am quite sure that this would enable the Government to decide and take action to correct any improper aspects.
But the basic reason is that all those who are now unable, or not easily able to avoid taxation, and make BLACK MONEY are dead against this move. It is these people who find fault in this. But no doubt the system is not yet perfected, so it is better that INTELLIGENT people give specific recommendations to the concerned Ministry for study and action if deemed fit. more  
I have given clear suggestions in this post. Hope you went through them. I expect that the Circle Managers who have access to the PM would take it forward. It will have more weight than coming from an ordinary apolitical person like me. And I do not claim to be any more intelligent than the next person. more  
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