A Terribly Taxing Tale

Goods and Services Tax: How helpful will it be?

 

Courtesy: Shiprocket.in

In India, the structure of Indirect Taxes (IDT) is complicated, confusing and time-consuming. Taxes like Excise Duty, Service Tax, Sales Tax/Value Added Tax, Luxury Tax, Octroi and Entertainment Tax are all levied on goods and services provided (in addition to the various cesses that are added and named quite ingenuously) by the government. Issues of double taxation and reporting to multiple authorities are also prevalent.

The Economist points out that according to the World Bank, India ranks 157 out of 189 countries for simplicity in taxes. With differences in the huge numbers of taxes and their rates between different states and the centre, manufacturing in State A and selling in State B involves a fair amount of paperwork and complications with queues of lorries idling at state borders.

But will the launch of the GST lead to India’s 1.3 billion-customer, $2 trillion-economy becoming a single market?

It is hoped that it will streamline different indirect taxes and cesses to implement a “single taxation system”. This would enable one or two rates for all products and services across the country, making it simpler for industries and services and reduce revenue leakages. State politicians and bureaucrats have expressed the concern that they will lose revenue by giving up the right to collect taxes, leading to the Centre guaranteeing reimbursement of potential revenue loss for five years. This is compounded by the fact that revenue data is poorly recorded and both the centre and states are anxious to ensure they are not affected by the GST. The GST Council has been witness to this struggle for administrative power in the collection and enforcement of GST.

The situation stands thus:

In their anxiety not to lose out revenue, the states have insisted on not bringing highly lucrative and rent seeking sectors (Alcohol, Petrol, Diesel, Real Estate) under the ambit of the GST. While a lot of taxes will now not be applicable, the dream of a single tax regime of 12-14% for all products and services is now four tiers of tax slabs with 5%, 12%, 18% and 28% plus an additional cess on demerit (sin) goods like cars, aerated drinks and tobacco products. The work for fitting the thousands of goods and services in these slabs is now on and the Government wants to implement GST from July 1, 2017.

• The GST Council has now approved a ceiling on the cess over and above the highest GST rate of 28% on sin products like pan masala and chewing tobacco but Beedis have been kept out of the cess net altogether to avoid political friction.
• The cess on colas and cars is at 15%, with total tax incidence at 43% (Tax 28%+ Cess 15%)
• Cess on Pan masala is at 135% implying that tax incidence cannot exceed 163%
• Cess on cigarettes and chewing tobacco is at 290%

So we eventually could have about 10 or more different rates depending on the cess levied. The government has said that it would remove cesses after five years, as it would no longer need to compensate States for any losses in revenue after that, but historically, no Government has ever removed a cess so far, only renamed or subsumed, elsewhere.

Courtesy: Financial Express

The implementation is likely to be challenging and troublesome. According to reports, service providers who operate nationally under a single centralised registration of service tax at present file three service tax returns in one year. In the GST era, they will have to file 61 returns per state, per year, after registering in each state in which they have presence.

With what looks like an administrative nightmare with complications in implementation, launching the GST on July 1, just three months away, seems like a race against time.

The Economic Impact of Demonetisation

India’s Gamble with Demonetisation

 

Courtesy: Business Insider

On the evening of November 8, 2016, Prime Minster Narendra Modi made an announcement that all Rs 500 and Rs 1000 currency notes (almost 80 percent of notes in circulation) would be cancelled with effect from the midnight claiming that this would be a strike on corruption.

Almost four months on, the country has gone through a lot of turmoil with long lines at banks, moneyless ATMs and tales of individual suffering. The Reserve Bank of India (RBI) and the government have stopped providing data on old currency notes. Demonetisation is now a pick of any of the following among fighting corruption, attacking terrorism financing, defeating inflation and creating a cashless society. It is interesting that Modi’s political popularity has barely been affected by this with Indians accepting the inconveniences for the claimed overall well-being. 

 

Economic Data

While it is too early to understand if demonetisation will achieve what it set out to do, it is interesting to understand how economic parameters are affected by the move. 

The Central Statistical Office (CSO) released data on February 28 stating that the Indian economy grew at a slower 7 percent in October-December 2016, down from 7.4 percent in the previous quarter. This estimate is surprising because of reduction in consumer goods sales in rural areas and muted investment activity because of the liquidity crunch. There is data that factory output contracted by 0.4 percent during December, against 5.7 percent growth in November. It is unclear how well this data has been captured by the CSO. 

Last week, the International Monetary Fund (IMF), said that India’s economic growth is expected to be 6.6 percent in 2016-17, against its earlier estimate of 7.6 percent in view of the disrupted supply chains and fall in demand for goods. 

   

Opinions

Economists realise that there is no precedent to follow for this cash ban and their models may not adequately capture the impact on the unorganised sector in India. Nobel laureate, Dr Amartya Sen has criticised this exercise and feels that with more than 25 percent illiteracy, with poor electrical, communication and digital infrastructure, a digital India is a pipe dream. Former Prime Minister Dr Manmohan Singh feels that India’s GDP for 2016-17 will come down by at least 2%. Other economists like Lawrence Summers, Kaushik Basu think that this was an ill-conceived move and bad economics.

However, economists Mr Bibek Deb Roy, member of NITI Ayog, Mr Arvind Nirmani and Mr Surjit Bhalla feel that this is a positive strike against black money and a good move. 

In conclusion, demonetisation has polarised some of the sharpest economist minds in the country and the world. There are those in support, and there are those who have either criticised its execution or the need for the decision itself. The long term impact is unclear to all and it is likely to take years before the economists and history can understand the true implications of this unprecedented move.

Financial Tales

Financial Tales

Graphic Courtesy: Canva.com

At Wall Street, they say 'Money Never Sleeps' and much closer to home, it's quite the same at Dalal Street. Pandemonium becomes king of the trading floor. Numbers, numbers, numbers, everywhere. Here, we find transactions worth millions of rupees taking place with the click of  a button, new data constantly pouring in being analysed with the blink of an eye and decibel levels soaring with people trying to make that perfect trade at the opportune moment. And they all have one goal: to make money. But there's so much more to the world of financial decision making than just that.  There's the decision making process to be considered, there are the policies in the country that affect the functioning of the firms, the regulations in place and of course, the general economic conditions at large. 

This blog contains my thoughts on select aspects of the financial world, both national and global. While this is not meant to be a full fledged analysis it merely conveys my take on some economic and financial events happening in India and around the world. With a background in commerce and an interest in understanding the behavioural aspects of finance and economics (albeit, with very basic knowledge of it), I chose to call my blog Flip-Flop Finance for two reasons. I wanted to present my take on every-day financial issues, but in an informal manner, with flip-flops and not close-toe shoes. I also want to make it a point eventually to understand the psychological aspects of these issues, and understand irrational and rational decision making, the dilly-dallying of the mind in making decisions we believe will benefit us.

This blog is thus, not just about money matters, it is an attempt to present a simple yet objective view on a range of topical and influential financial issues, through the lens of an enthusiastic student of the field. 

Happy Reading!