Comments on Goods & Services Tax (GST) and Income Tax (IT)

Comments on Goods & Services Tax (GST) and Income Tax (IT) by Maj P. Tuhinikar Choudary (Retd)  Chairman - Institute for Democratic & Economic Affairz (IDEAz) www.ideaz4india.com Summary Taxation is a necessity, it should however be fair and equitably applicable to all. Understanding the difference between increasing percentages and increasing amounts leads to inequity in Income Tax. Income Tax is a system of Double Taxation that really applies to only about ONE percent of the population excluding Government employees and is also net revenue negative. It should hence be done away with. Comprehensive Goods and Service Taxes based on consumption is the best way of equitable taxation. A differential tax slab system for essential and Public Distribution System goods will make it more equitable. Collection of Tax must be in a way as to show Trust in people while at the same time insisting on regular verification and applying strict penalties to defaulters. Universal and Equitable Coverage: Any equitable taxation system should be universal in its coverage and not too burdensome at any level of wealth of the population. Let us create an environment of Trust and encourage wealth generation. The I.T. regime which in the 1970’s had a marginal rate of up to 97.75 percent tax plus various cesses that at times would have even totaled over 100 percent, may have seemed reasonable to all the envious Socialists and Marxists, but look at the black economy it resulted in and also to the discouragement of wealth creation by those who could. Consumption tax or as we today call it, the Goods and Services Tax (GST) is the best and most equitable way of taxation, if a few guidelines are followed as below:
  • The GST is an equitable and inherently progressive tax as the more one consumes or spends the more this tax amount and hence the rich automatically pay more as they consume more. One should not confuse percentages with actual amounts.
  • Especially if taxation for essential and those items covered under the Public Distribution System (PDS) for the weaker sections, is kept at a low rate of only one percent.
  • GST should cover all items of commerce and service, even if some of them are also only at one or even half a percent.
  • Allowing items to be under the zero tax slabs does not allow for proper monitoring the sale and movement of such items and hence gives scope for smuggling, corruption and black money. The volume of trade in items such as food grains will be very large and definitely needs monitoring, and hence should be taxed.
  • All unpacked/open items and essential commodities presently being sold through the Public Distribution System (PDS) to the poor may be allowed for sale through the Kirana shop or any other shop, with GST collected at only 1 percent or half a percent. All packaged food items should be taxed at 5 percent with the aim to keep the cost of food items low for everyone.
  • GST should cover every party as everyone claims equality. Proposals as allowing for tax free sales for those whose turnover is less than 20 lakhs or at a reduced rate of 5 percent for those whose turnover is below 1.5 crores are erroneous. Even the smallest Kirana shop owner will be buying all packaged goods from others who will collect the GST as applicable under the MRP. If the kirana shop owner is not allowed to collect GST in turn he would be unable to claim offset for tax paid. Hence one percent or even half a percent GST should be collected on items sold as open or unpackaged through such shops and for other / packaged food products the GST could be at 5 percent. Other consumer goods can be at either 5 percent or 10 / 12 percent as deemed fit. As even a simple single entry system is good enough to account for tax paid and tax collected and tax to be paid after set-off , it is wrong to say a small Kirana shop owner cannot do so. In case of difficulty thay may call on the services of Accountants as is being done for Income Tax.
  • Allowing State Governments to take over the monitoring of GST for assessees with less than 1.5 Crore turnover is only protecting the unofficial earnings of the State Commercial Tax Department Staff, providing greater scope for confusion and corruption. The system should be transparent and allow scope for discretion to be exercised by any official.
  • Cess over and above the GST rate for that class of items should only be for items for which we seek to discourage consumption, eg: alcohol and tobacco. For such items the cess can be exceedingly high even over 100 percent or more, to avoid reduction in present prices due to GST.
  • Beer and wines with less than 7 percent alcohol content should be classified as soft drinks and all taxed under the packaged food items rate of 5 percent. This will encourage tourism. After all even cough syrup has higher alcohol content.
  • Cess on petroleum products could be kept at such level as to approximate the existing prices to which people have been accustomed to or perhaps reduced 20 percent from its peak levels or at best reduced by about 10 to 20 percent for the present. This is to nudge people away from increasing their consumption as would happen if prices are dropped too much. This can be seen as an environment protection step and as a way to control the expenditure of our limited foreign exchange resources.
  • Taxes on enablers, items that are not generally end use products but whose consumption leads to greater production of other taxable Goods and Services, such as Fuel, Energy, Spectrum, Coal etc, should be kept low and any auction of such enablers be undertaken in a manner as to protect the end user and also provide a decent return to the Government.
  • Octroi / Entry tax into any City or State must be removed as it defeats the very purpose of GST and only encourages corruption.
  • Tax for self employed workers such as plumbers, carpenters, electricians, masons, should be at 1 percent and be self assessed, say once every quarter or half year, and they should be allowed set off against GST paid vide invoices for their purchases of trade materials. This will ensure responsibility and monitoring of work undertaken and also encouraged the employment of duly certified / licensed tradesmen.
  • Under GST, savings can be taxed as Service rendered by the Bank, the interest can be taxed at 5 percent or 10 percent as deemed fit.
  • Rental income is also taxed under GST at the higher rate of 10 or 12 percent.
  • Dividends can also be taxed under GST as Service Tax at a rate as deemed fit, say 10 / 12 percent as applicable, and be payable by the Company.
  • Salaries can be taxed under GST as Service Tax at 5 percent or 10 / 12 percent as deemed fit by and be payable by the Employer.
  • Under a full GST regimen, the rich pay tax proportionate to their expenditure. Since their expenditure is much higher they automatically pay much more. It is inherently progressive and this equality is important when claims of equality are made in all other things. After all it is equality and not equalness that is aimed at (See – ‘EQUALITY for ALL’ or ‘ALL are EQUAL).
Taxation Levels and Compliance: It would be best to have taxation of 1 or at least half a percent for the unpacked PDS food items, 5 percent for all packed food items and a flat rate of either 10% or 12% for everything else. For ease of operation, tax should continue to be collected after the sale in the following month as used to be done under VAT. We should trust our people and allow for self assessment, which should however be monitored randomly and the penalty for non compliance be about 10 times the tax that was payable. The many rules for filing returns under GST as now applicable can be done away with. Luxury Tax: There should be no luxury tax or cess, as luxury is only a misunderstood concept arising out of envy. The idea of luxury tax is only a misguided response to social misperceptions. Items which were considered luxury just some years ago are today seen as essential necessities (refrigerator, washing machine, microwave oven, etc) that result in saving food, water, time and also enhance productivity. Also luxury items are generally that which involve high R & D and innovation costs and the benefits of such R & D and innovation soon goes down to consumer items at lower costs, enhancing safety, better use of resources, robustness and efficiency of products. Attempting to deny the benefits of higher returns on such items denies improvement down the line (eg: shaving razors, home appliances, etc). Also we should note that the reservations for manufacturing under the Small Scale Sector has only led to our dependence on imported products even for so called simple items such as shaving razors. Imagine what would have been the case, if mobile phones were not allowed to be freely sold in those days when mobiles were few and costly. Today economy of volume encourage ‘Make in India’. Allowing and encouraging envy is bad for the Society and for the Country, instead encourage innovation and entrepreneurship.   Income Tax: Income is wealth created by entrepreneurs who take the risk of failure, not just salary paid to workers. Salary can be taxed under GST at the rate of say 1 percent up to a level and 5 percent or 10/12 percent as deemed fit as a Service Tax as they are payments for services received. In an environment in which we seek to encourage wealth creation, taxing such wealth would be self defeating and also a kind of double taxation as spending such wealth also attracts comprehensive tax under GST. Also Direct Tax on Income is now paid by less than 3 percent of the population (against 45 percent -70 percent in other Countries), the slight increase even after demonetization and the implementation GST does not in any way change the arguments and as agricultural income, a state subject, is exempted. It is not realistic to now expect the States to legislate against the interests of their legislators to bring agricultural income under I.T. We therefore need to find a more equitable and not too burdensome, but almost self regulating way of collecting tax revenues. GST, which incorporates a separate low rate for essential items especially food items, is the best way of equitable tax collection. Out of these about 3 percent income tax payers, over 2 percent are Government employees from whom the Government only transfers from one pocket to another pocket by increasing emoluments. The money collected from the less than 1% private sector employees is estimated to be much less than the costs of collection and enforcement and the interest and depreciation on the capital costs of the assets of the IT department at market value and the costs of maintenance and operation and of the personnel, their perks and pensions and of litigation and consultancy etc. Hence, the IT Department is actually likely a net revenue loss to the Government. Therefore, there is a strong case for completely removing Income Tax since the GST has come into operation, and can be made more comprehensive as suggested herein. (See – ‘DREAM BUDGET- Version - 2.0 - The Way Forward’). Black money is clearly the child of misconceived IT laws , illegal mining, under invoicing of gold and jewellery, under reporting of exports / imports, real estate transactions and such like, would all become transparent and above board if there is no necessity to hide wealth, especially if stamp duties for property transactions are collected at a fixed fee of say Rs. 1000/- to Rs. 20,000/- to meet the actual costs for registering and recording Wills, Sale Deeds, Agreements and Contracts etc, enhanced periodically to allow for inflation, and not collected percentage wise, which in these days of high property values will continue to encourage under reporting and hence generation of unaccounted money. Of course under a comprehensive GST scheme even such money, when used, would generate tax revenue. Property taxes can be collected by the relevant authorities, which if they are determined in a transparent and equitable manner and made applicable to all, as per their holdings, will also encourage compliance and enhance revenues and avoid the creation of slums. Money is of value only when it is in circulation. Money held as jewellery and gold and unutilized land would become like stagnant ponds that are soon covered by slime and become of little use for adding value to life. Circulating money encourages wealth creation, like flowing river water generates power and wealth through irrigation and also purifies itself. Hence kept GST rates low but make them comprehensive. All dividends paid out by Corporates can be brought under Service Tax and collected from the Corporates as the provider of the Service of enhancing the value of the investments and all exemptions (Depreciation etc) be done away with. The Corporates will also, in any case, be paying GST on all their Purchases, Sales, Services, Salaries and other expenses. They could also be asked to pay a 5 percent tax on the salaries and remunerations paid out by them as a deemed Service Tax on the Service provided. Also I.T. on wealth creation is a negative idea and if such wealth is again taxed on expenditure as GST, is ‘Double Taxation’. Such ‘Double Taxation’ would soon drive the Entrepreneurs out of the Country to better climes. This would be disastrous for all remaining in the Country. We need to encourage such wealth creators to remain here and create wealth here. (See - Annexure - The story of the Ant and the Grass Hopper). If all exemptions and concessions are done away with and all expenses and purchases are made liable to GST and interest, salaries and dividends also brought under GST, then we can and should also do away with Corporate I.T. It then forces the Company’s to encourage investments in them by offering better dividends. Today, the IT department officials are presenting their case for continuation of Income Tax perhaps only to protect their opportunities for illegal sources of revenues and power. Also since even capital gains from property sales can easily be seen as affected by the development provided (a Service) by the Government, the difference in the original purchase cost duly indexed to the inflation each year, from the present sale price should also be deemed liable to Service Tax at 5 percent or 10/12 percent as deemed fit. There need be no Capital Gains tax thereon. We today, need to encourage people to invest in the equity market through properly regulated Mutual Funds and even Venture Capital Funds and thus encourage entrepreneurs and long term infrastructure projects. Today greater wealth is being created through the use of non-tangible assets than the tangible assets, and generation and distribution of such wealth is not a zero-sum game as it is with tangible assets. Some of the top corporations and businesses of today do not hold any notable assets. (Airbnb, Ola, Google, etc). Equitability in the distribution of wealth in a population is more a matter of opportunity than of differences in its holding at any particular time. Nature’s Laws cannot be over looked without drastic costs. As the Pareto’s principle recognizes, 20 percent of any group (population, customers, activities and so on) will generate or gain, 80 percent of the benefits. This 20 percent will also be divided in the same manner and thus 4 percent will gain 64 percent and finally 0.8% will hold over 51 percent. This is a Natural Law and there is no point railing against it. Like Gravity it prevails even if one doesn’t believe in it. What needs to be looked at is not who holds how much at any one time, but whether the same people will continue to so hold their present share for all time, like the Rajas or Nizams of yesteryear. It is obvious that today there is a continual churn in who holds what wealth, and as long as we each can see to way to work our way up, then we really should have no grievance. In each generation we note that the top 1 percent or 10 percent or 20 percent does not consist of the same people or families or corporations, hence to cry out against wealth generation is only displaying envy and an inferiority complex of not being willing to strive to improve one’s lot. Instead they cry for the Government to take away from others and give to them. An indirect way of stealing that soon results in societal collapse. The cry for I.T. and for differential percentages of tax rates that are inequitable and burden people earning more than they do, comes from those who seek the benefits and security of Government jobs that do not insist on performance and which offer lots of leisure time, limited working hours and life time pensions. They enjoy their leisure and benefits but do not put any monetary value on them. Security of employment, its perks and Family and Friends time should all have a value and not be taken for granted. After all, those who sacrifice such things should rightly be entitled of whatever extra compensation they may receive. Of course many fail and no one really compares oneself with those who failed. However, if in view of all the above I.T is done away with, this point would become a non issue though the attitude would still need to be changed from an envious one into an appreciative and competitive one. Lastly let us each ask ourselves the question - why is it that we always and see inequality only in comparison with those above us but never with those below us? Conclusion:         Annexure: Ant and Grasshopper The Original Story - The Ant works hard in the withering heat all summer building its shelter and laying up supplies for the winter. The Grasshopper thinks the Ant is a fool and laughs and dances playing the summer away. Come winter, the Ant is warm and well fed. The Grasshopper has no food or shelter so he dies out in the cold. Now the Indian Version of the story - too good and really factual The Ant works hard in the withering heat all summer building its shelter and laying up supplies for the winter. The Grasshopper thinks the Ant is a fool and laughs and dances and plays the summer away. Come winter, the shivering Grasshopper calls a press conference and demands to know why the Ant should be allowed to be warm and well fed while others like him are cold and starving. NDTV, BBC, CNN , Asianet show up to provide pictures of the shivering Grasshopper next to a video of the Ant in his comfortable home with a table filled with food. The World is stunned by the sharp contrast. How can this be that this poor Grasshopper is allowed to suffer so? Arundhati Roy stages a demonstration in front of the Ant's house. Medha Patkar goes on a fast along with other Grasshoppers demanding that Grasshoppers be relocated to warmer climates during winter and taken care of. Mayawati states this as 'injustice' done on Minorities. The Internet is flooded with online petitions seeking support for the Grasshopper CPM in Kerala immediately passes a law preventing Ants from working hard in the heat so as to bring about equality of poverty among Ants and Grasshoppers. Railway minister allocates one free coach to Grasshoppers on all Indian Railway Trains, aptly named as the 'Grasshopper Rath'. Finally, the Judicial Committee drafts the 'Prevention of Terrorism Against Grasshoppers Act'[POTAGA] , with effect from the beginning of the winter.. Education minister makes 'Special Reservation' for Grasshoppers in Educational Institutions and in Government Services. The Ant is taxed and fined for failing to comply with POTAGA and having nothing left to pay his retroactive taxes, it's home is confiscated by Government and handed over to the Grasshopper in a ceremony covered by NDTV, BBC, CNN. Arundhati Roy calls it 'A Triumph of Justice'. Railway minister calls it 'Socialistic Justice'. CPM calls it 'Revolutionary Resurgence of Downtrodden' Many years later... The Ant has since migrated to the US and set up a multi-billion dollar company in Silicon Valley , 100’s of Grasshoppers still die of starvation despite reservation somewhere in India , ....AND As a result of losing lot of hard working Ants and feeding the grasshoppers, India remains a poor and developing country...!! P.S.: I have no idea whose creative mind this really evocative story has come out from on ‘WhatsApp’, but it is very apt and makes you think! - Jai Hind! -
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