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The path towards GST remains strewn with obstacles

Kitty Miv, Editor
23 August, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

There is a theory, usually expounded by free marketeers, that governments, and societies at large, benefit from tax cuts because: taxpayers are less inclined to find ways to avoid tax and therefore the government collects more revenue; more revenue for the government means more can be spent on public services; and a lower tax burden means people have more disposable income to spend, and businesses have more money to invest. In other words, everyone's a winner!

But has the theory been tested in the real world? I suppose you could say that it holds true to some extent. Look at the countries that enjoyed stellar rates of economic growth prior to the last financial crisis. They tended to be low-tax economies like Singapore, the United Arab Emirates, and Ireland. Many high-tax economies, particularly in Europe, barely registered a blip on the growth radar, and are still suffering hangovers from the crash – it's surely no coincidence that Europe's fastest growing economy is Ireland once again.

So why don't high-tax countries ever learn the lessons of their less heavily taxed brethren? Well, it's probably because the real world is complex, and so are taxes. Governments must of course ensure that they collect enough revenue to cover spending, and obviously the more a government spends, the more revenue it needs. But I wonder just how much the cost of tax complexity is factored in to tax rates. As I noted in this column recently, if the United States eliminated the USD1 trillion it spends on "tax expenditures" – credits, deductions, exemptions, etc. – it could slash corporate tax from 35 percent to 21 percent and still collect the same amount of revenue, according to the Center for American Progress. This is purely hypothetical of course, because it's a theory that's unlikely ever to be put to the test. But at least one country is attempting to put it into practice. Instead of hiking VAT by three percent, as proposed in the 2016 Budget, budget negotiators in the Philippines have agreed to maintain VAT at a relatively low 12 percent, and just make the thing more efficient. And I congratulate them for it.

Remaining on the subject of consumption taxes, the approval by India's parliament of the GST constitutional amendment bill has been one of the most significant developments in international tax recently. And the Central Government was given a considerable boost with the news that the state of Assam has decided to back the change. But, as I touched on in last week's piece, in a sense this is only the first hurdle that must be overcome before the tax becomes operable. Unfortunately, the path towards GST remains strewn with obstacles.

So, what needs to happen next to make GST possible? Several things in fact, legislatively, administratively, and technically. Assam's announcement was a good start, but each of India's 29 states will separately have to pass legislation for the state-level component of the three-tier GST. Additional legislation also needs to be approved at Central level, including the central component of the GST, and the Integrated GST (IGST) on inter-state trade. However, before this can happen, half of the states must ratify the initial constitutional amendment bill to allow the President to approve the notification to amend the constitution. This would trigger a 60-day deadline, within which the President must appoint a GST Council. This Council will be chaired by the Union Finance minister and include all state finance ministers and will have quite a task on its hands.  On the Council's considerable checklist will be, among others: determining GST rates, including reduced rates, if any; goods and services to be exempted from GST; when GST should be extended to petroleum products; place of supply rules; administrative rules; and how disputes will be resolved. This last item is likely to be a particularly thorny issue, given the overlapping nature of the GST regime, and the different competencies involved at state and central level. Only once these issues are resolved can parliament pass the necessary GST and IGST bills, which will be based on the Council's recommendations. Not only this, but the success of GST is likely to rest on the performance of an IT platform that will serve as the system's nerve center. Will it be up to scratch? Suddenly, April 1, 2017, looks frightfully close. 

The effort being expended by India on finalizing its GST regime is an indication of how difficult it is to make value-added tax-type systems operate seamlessly within a federal constitutional structure. Canada for example has tried to mitigate the administrative burden of operating provincial GST and a federal GST by creating the Harmonized Sales Tax. However, British Columbia thought HST worse than the old system, and has decided to go back to its former PST regime.

In Australia, some states are just as disillusioned with the country's fiscal "horizontal equalization regime," (HER) under which GST revenues are collected by the Federal Government, and apportioned to the states using a set formula. Particularly vexed is Western Australia, which only receives back 30 percent of the GST revenue collected from consumption in the state. Yet, mention by Prime Minister Malcolm Turnbull of possible reforms to this system prompted a hostile response from other states, who are doing very well out of the status quo, thank you very much.

If WA is determined to get a better deal under the HER system, perhaps it could do worse than enlist the combined lobbying powers of two of the world's largest mining companies – Rio Tinto and BHP Billiton. If the National Party gets its way, both firms are on the hook for paying higher mining levies in the state, and are very unhappy about the prospect of doing so. But persuading the Government to tweak that formula in WA's favor may well get them off it.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

Philippines learns

India progress

Kitty's Execrations

Australia unbalanced




About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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