Is the world simpler than it was before GST? This jury is in

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The World Bank’s March 2018 version of ‘ India Development Update’ has some critical remarks on the goods and services tax (GST). But it isn’t as harsh as headlines have made it out to be.

The headlines have largely been driven by the following, “Comparing the design of India’s GST system with those prevailing internationally, we note that the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28%, which is the second highest among a sample of 115 countries which have a GST (VAT) system and for which data is available.”

This criticism is linked to the second criticism. “Next, we assess how the number of different GST rates prevalent in the Indian system, and thus its complexity, compares internationally. The Indian GST system currently has 4 non-zero GST rates (5, 12, 18, and 28%)…. Most countries around the world have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only 5 countries including India use four rates. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana. Thus, India has among the highest number of different GST rates in the world.”

It’s extremely unlikely that India will ever have a single rate, since equity considerations override those about efficiency. We are probably headed towards three rates, with 28% declining, but 5% also increasing. One can’t have one without the other.

Since we are in a process of transition and haven’t yet reached the terminal goal, the criticisms are valid. But so is the point about incremental improvements, something that the GST Council has been attempting. While I can understand these criticisms — or those about some items and the entire chain (a function of the threshold) not being part of GST, or those about hardware, software and systemic constraints — I cannot understand how GST has made everything more complex, a criticism often levied

It may have made life more complicated for those who were outside the indirect tax system and didn’t pay taxes. But how has it made it more difficult for those who were part of the tax chain?

Legislative Outback

Resistance to change is universal. Transition to GST is always difficult. Witness Australia’s A New Tax System (Goods and Services Tax) Act of 1999 (operational from 2000). Witness the debate about exclusion of basic food items, or the dispute between the federal government and the state government of New South Wales there.

Specifically, I am a great admirer of Section 165.55 of Australia’s 1999 GST legislation, although it is not easy to fathom what it means. “For the purposes of making a declaration under this subdivision, the commissioner may: (a) treat a particular event that actually happened as not having happened; and (b) treat a particular event that did not actually happen as having happened and, if appropriate, treat the event as (i) having happened at a particular time; and (ii) having involved particular action by a particular entity; and (c) treat a particular event that actually happened as: (i) having happened at a time different from the time it actually happened; or (ii) having involved particular action by a particular entity (whether or not the event actually involved any action by that entity).”

In an ideal world, there would be no tax lawyers, no chartered accountants and no legalese. As William Shakespeare said in Henry VI, Part 2, “The first thing we do, let’s kill all the lawyers.” Actually, Shakespeare said nothing of the kind. He made Dick the Butcher say this. And we still don’t know what Shakespeare intended — cracking a joke about Dick, or cracking a joke about lawyers.
In a less-than-perfect world, there will be tax lawyers, chartered accounts and legalese, the last necessary step to reduce litigation. GST, in Australia or in India, doesn’t make the world perfect. Is the world simpler than it was before GST? That is the question.

I can’t leave you itching to know what the mysterious Section 165.55 is about. An entity is a legal entity: individual, body corporate, partnership trust, etc. Schemes give entities GST benefits. All Section 165.55 means is that a commissioner making a declaration can disregard a scheme.

A scheme is linked to an event that happens at a specific time and to an action taken by the entity. Since the commissioner has the right to disregard a scheme, he disregards the event (which leads to the scheme). Therefore, an event that has actually happened is treated as not having happened and vice versa.

The Great Barrier Brief

I guess the time and the action bit are also obvious now. But this still begs the question. There is a Plain English movement that is not unknown in Australia. Couldn’t the language of 165.55 have been simplified to make it comprehensible to the non-lawyer? It should have been possible. It isn’t gibberish, nor is it gobbledygook.

I suppose the desire to avoid litigation overrode the desire for simplification. But if we accept this logic, that rationale is also equally applicable in India. I haven’t yet found the counterpart of 165.55.

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