Sukumar Mukhopadhyay: GST: Will it increase revenue

In the First Discussion Paper for Goods and Service Tax (GST) presented on November 10, 2009, it has been claimed that the revenue will increase if GST is introduced. 

At Para 1.15, it has been claimed that the GST will give “more relief to industry, trade, agriculture and consumers....” and at the same time it has been claimed that “there may also be revenue gain for both the Centre and the states primarily through widening of tax base and possibility of a significant improvement in tax compliance”.

In other words, the GST may usher in the possibility of a collective gain for industry, trade, agriculture and common consumers as well as for the Central Government and the State Governments. The GST may, indeed, lead to the possibility of collectively positive-sum game. Let us examine whether this claim of higher revenue from GST and at the same time lower tax burden on the trade and industry is in the realm of reality or utopia. In this context, we must remember what the famous economist Shankar Acharya wrote recently in Business Standard that the talk of higher revenue from GST is a myth. My view on the subject is also the same and it is based on the following grounds.

a) GST is an amalgamation of taxes

GST, as it has been proposed, is an amalgamation of the following taxes.

Central Taxes

(i) Central Excise Duty (ii) Additional Excise Duties (iii) The Excise Duty levied under the Medicinal and Toiletries Preparation Act (iv)  Service Tax (v) Additional Customs Duty, commonly known as Countervailing Duty (CVD) (vi) Special Additional Duty of Customs - 4% (SAD) (vii) Surcharges, and (viii) Cesses.

State taxes

(i) VAT / Sales tax (ii) Entertainment tax (unless it is levied by the local bodies). (iii) Luxury tax (iv) Taxes on lottery, betting and gambling. (v) State cesses and surcharges in so far as they relate to supply of goods and services. (vi) Entry tax not in lieu of Octroi.  The Discussion Paper says that all these taxes will be subsumed within the GST. Thus the GST is nothing but an amalgamation and it cannot yield more revenue than what the individual components yield now. It is mathematically irresponsible to think that the summation of several taxes will be more than what the items individually are. The Discussion Paper seeks to convey that it will be because of better compliance and because of widening of tax base. 

b) Widening of tax base

There is no proposal at all within the GST proposed in the discussion paper to widen the tax base. There is no new tax proposed. The only way the tax base can be widened is to reduce the threshold level. But that is a very uncertain situation. The Discussion Paper does not say that the threshold will be brought down. The proposed ones are not very much lower either. Moreover,

            it is well-known that if the threshold is too low, compliance suffers in a big way. It may, therefore, be counter-productive from the point of view of revenue. c) Better compliance It is also wishful thinking that GST will improve compliance. It must be remembered that the present transition is not from turnover tax to GST; it is a transition from VAT and Cenvat to GST.  They are all of the same nature. So there will be no qualitative change at all in the nature of compliance.    d) Past experience of other countries. VAT/GST is not a money spinner. The example of other countries shows that it is a myth that VAT/GST by itself increases revenue. An expression commonly used by economists about the ability of VAT to fetch revenue is that VAT is a money-spinner or a money- machine. I have examined this claim empirically and found that this is a myth. The data available are not comprehensive but adequate to draw or demolish a conclusion. 

demolish a conclusion. After all the same data are available to all. 

Source of the data is the following. (i)Alan A. Tait – VAT Revenue, Inflation, and the Foreign Trade Balance, p.19 edited by Malcolm Gillis, Carl S. Shoup, and Gerardo P. Sicat in Value Added Taxation in Developing Countries, A World Bank Symposium, 1990 (ii) Milka Casanegra de Jantscher – Administering the VAT, p.172 of the same publication. (iii) Carlos Logo –The VAT in Brazil in the same publication, (iv) International tax and public finance Nov. 2003 & International Bureau of Fiscal Documentation, Value Added Taxes in Europe, Amsterdam. (v)Sijbren Cnossen-Tax Policy in the European Union, 2001, p36.



We find from the above table that there are eight countries in our study where the growth of VAT revenue as percentage of GDP has been negative. One of them is Brazil about which the data are not exactly comparable to the above countries but the conclusion is the same that there has been a negative growth over a period of time. In Brazil in 1968 VAT revenue, as a percentage of total tax revenue was 51.03 while in 1985 it became 21.91 and in the period in between it gradually fell. In comparison income tax rose from 21.8% in 1968 to 58.97% in 1985. The performance of 11 countries has been good (3% and above). However, we have to consider that in the European Countries, the revenue from excise on cigarette, beer, wine, spirit and gasoline was a considerable percentage of GDP.   Therefore, the performance of VAT in European Union countries is to be taken as 9.6 per cent less since that is the share of excise in what goes as VAT revenue.   Those who call VAT a money-spinner have not taken into account various factors, namely (i) the percentage growth in previous years; (ii) increase in rate of tax; (iii) the fact that in many countries the growth is negative; (iv) the EU average itself is marginally positive. The EU average yearly average is only 0.25%, which means that Europe as a whole has not fared so well; and (v) other taxes, namely, income and security taxes have grown much more than VAT.   The conclusion is that the whole exercise is nothing but an amalgamation of existing taxes. The statement in the Discussion Paper that “the GST may, indeed, lead to the possibility of collectively positive-sum game” is nothing but a wishful thinking.