Saturday, 2 January 2016

The Adverse Effects of the Goods and Service Tax in India

The corporate world of India is hopeful about the introduction of Goods and Service tax or GST. It is supposed that it will rescue the national market from the global slump. It is true that the GST will make the inter-state business convenient and the growth rate will improve substantially. But there are other problems which will cause problems to the financially weaker states in India.

 GST

Against the Autonomy of Indian States
But this small benefit will take away the autonomy of the states. At present the states impose the taxes as per their needs. But after the introduction of GST, the states will have to charge the taxes as laid down by the Union Government.

Financial Crisis for Poor Indian States
But the insufficiency of the tax will create economic crisis for the financially weaker states, as is happening in Greece and other European countries where Euro is the currency. These countries abandoned their respective currencies and adopted Euro as a common currency. They even closed down their central banks and the new common currency Euro began to be managed by the European Central Bank. The European Central Bank started taking decisions about the currencies in European countries.

The similar system of GST is proposed in India in which the Union Government will take decisions about sales tax in the country. The Union Government will control the whole system of Sales Tax and Excise duty throughout the country. The economically weaker states in India will face the similar adverse effects of GST, as was faced by Greece after surrendering its financial autonomy to the decisions of European Central Bank.

Crisis in Greece
The roots of the crisis in Greece lie in its failure to face the competitive powers of developed countries. The weaker states will face the same crisis after the introduction of common system of Sales tax throughout India.

The raw and unfinished material from the developing countries is entering the markets of Europe in large quantities. The average daily wages in India are around 300 Rupees, while it is more than 6000 in Europe. As a result the products manufactured in Europe become costlier. This has led to the closure of Industrial units in Europe.  That is why the sellers find the products manufactured in India and China cheaper than their counterparts in Europe. This has created pressure on all the European economies and this pressure directly appears and had affected the weakest economy of Greece.

The expenses of the Government of Greece were more than the income. This was the chief cause of economic instability in Greece. The government was paying increased salary and pension to its employees and there was a leakage in the government revenue too. The Government of Greece borrowed to bridge the gap between income and expenses. It is a common fact that the economic balance gets disturbed when the expenses surpass the income. This fact became the reason of economic crisis in Greece. The situation became worse with each loan taken by the government. The loan giving banks imposed the condition that the government would increase the rates of the taxes so that the income may increase to decrease the deficit.  But the increase in taxes decreased the income of the government. The taxes increased the cost of the products made in Greece which decreased its sales in the international market. The reduced sales decreased the income of the government of Greece which further aggravated the economic crisis.

Argentina Survived due to its own Currency
The similar situation had occurred in Argentina few years ago when the expenses of the government were more than the income.  In such condition the products manufactured in Argentina became costly and the industries came under great pressure. The decreased production reduced the sales tax and excise duty of the government of Argentina. In such a situation the currency devaluation was executed the government. Argentina had the power to devalue its currency as it was its own currency which was not subjected to the control of any central bank. But the situation is different in Greece.  After the devaluation the products of Argentina became cheap in the international market.  As a result the industries started running, the revenue increased and the financial crisis came to an end. This positive development occurred because Argentina has its own autonomous currency and the country went for its devaluation as per its needs.

Helplessness of Greece
Today Greece is on the same lines like Argentina. The products of Greece are costly, the industries are being closed and the state revenue is decreasing. The loans make the things move for few months and then the same crisis prevails. In such a situation it would have been better for Greece to go for the devaluation of its currency. But doing so with Euro is not within the power of Greece.

Devaluation of Currency by China
It is worth mentioning that the government of China too went for the devaluation of its currency Yuan, as the products made in China were not getting the buyers in the international market. China devalued its currency to make its products cheaper. But Greece cannot go for the devaluation of its currency as it has no currency of its own. Is currency is under the control of European Central Bank. As a result the crisis is increasing in Greece and even the Prime Minister of the country had to resign. The new elections are scheduled on 20th September of 2015.

Indian Situation
The GST would affect the weak states of India in the same way as Greece was affected by the European Union. At present the autonomy in the States gives them the power to increase or decrease the taxes as per their requirements.

Recently the state government of Delhi increased the taxes on oil and petrol to generate the resources for health and education services. But this thing would become impossible after the coming of GST. Due to the weak education system the Chief Ministers would not be able to control the unrest of the people as his hands would be tied by the GST and he may even lose his post. The Union Government of India had found the way to push its States into the Greece like crisis. 

In addition it is necessary to differentiate between the consumption of the products used by the rich and the poor. It is the right policy to increase the taxes on the products used by the rich like cars, flat screen TV, smartphones, air travel etc., and reduce the taxes on the goods used by the poor like bicycles, saris, matchboxes etc. But the principle of GST is to charge equal taxes on all goods so that the system may become consistent and easy without any controversy. As a result the products used by the common man would become costly.

Confessions of Finance Minister of India

Arun Jaitley, the Finance Minister of India is of the view that the states will start getting the benefits from the very first day when the new system of GST becomes effective and the consumer States will benefit more than the producer States.

While addressing the Advisory Committee of parliament related to finance Ministry, he told that the introduction of GST system would not cause any financial loss to any Indian State. He further elaborated that the Union Government would pay for the losses for the next five years after the introduction of GST system. The Union Government would also compensate all earlier financial damages caused to the States. During the period of 5 years, the compensation would be to the tune of 100% for 3 years, 75% in 4th year and 50% in the last year.  

He further elaborated that, accepting the demands of goods producer states, the provision of additional 1% tax has been made in the GST legislation which will have to be borne by the buyer states. The provision of two years has been made for this tax in the legislation and thereafter the GST Council would decide, whether this tax would be continued or not. 
He said that he States have been assured that the introduction of GST would not damage their interests.

Herein the finance Minister has himself confessed that the GST system would cause financial losses to the States.

US Administration Wants GST in India

A chief officer of Obama administration in US said that the Modi Government in India has evoked interest in the private sector of America, but first the Indian government has to move ahead with economic reforms including the implementation of GST.  He further stated that more transparent and reliable tax system is very important in India.



Nisha Desai Biswal, the assistant Foreign Minister of America for south and central Asia, is of the view that Narinder Modi, the Prime Minister of India has spoken about the economic journey of India on different global forums and has advocated the efforts to strengthen it. She emphasized that the transfer of power in the hands of Mode in India has evoked great interest in the private sector of America. Being an advocate and mouthpiece of Obama government in south and central Asia, she said that in her opinion Modi is probably the biggest brand ambassador of India to generate such interest.