GST: If rates have to go lower, we must improve competitiveness

If you happen to be in Singapore and you have a restaurant bill, you will notice that the GST line tells you that it is at 7%. If you inquire further you will find that while Singapore GST (one single rate across goods and services) is at 7%, Malaysia is not happy at 6%. These are examples of the lowest level of taxation (if you also add personal income tax), even better than countries like Switzerland.

When tax on goods and services is low, it is a reflection of the country’s competitiveness. The most competitive countries are those who have the least taxes on their produce.

No wonder Switzerland and Singapore are the two most competitive countries among all nations.

I was asked by several people why is India’s GST rate going to be so high at 18% (well, it could be more for some commodities and services and less in some). It is going to be high because it is already high.

For India, it is little known, how high or low are the taxes in comparable terms, both direct and indirect. Direct income taxes start from 10% and goes right up to 35%, but only recently we have 5% of the population filing returns out of which some 2.5% actually end up paying.

The real taxes are paid by the commoners through indirect taxation, which is not too low and it impacts the cost of goods and services. The manufacturers pay customs duty for imports, excise and sales tax and there are service taxes, which goes right up to the consumers, who pay for it entirely. The net of all this is close to 18% (after all offsets) on the whole on goods and every consumer pays for it from the poor to the very rich. In real terms it protects the domestic industry in some ways but it hurts the consumer at the end.

This means in relative terms our Asian tigers and those in the first world in Asia, like Singapore actually have the least taxation in the indirect area. It is again a reflection that Singapore can afford such low rates due to higher competitiveness.

Let us see what Singapore pays on income taxes and it starts at 15% and ends at 20%, so there as well they are better off. The total personal tax collection in Singapore for 2015 was $9.2 Billion, while its GST collection was $10.3 Billion for a resident size of 5.4 Million.

Per capita income tax for Singapore comes to $1700 per capita, while its GST comes to $1900 per capita.

India collected Rs.7.42 lakh Crore or Rs.5936 per capita ($88.6 per capita) of income tax, in which 2.5% of the population paid income taxes. India also collected Rs.1449094 Crores of indirect taxes, which translates to Rs.11147 per capita or $166.3 per capita per year.

This is a very lopsided equation as very large numbers do not come close to paying taxes or enjoy the bulk of the goods that the others enjoy. Taking out those below the poverty line makes these numbers look different.

If we apply Purchase Power Parity terms, India’s indirect tax collections are actually not very lower than Singapore, if the leakages are plugged.

The mistake some make about taxes is that rate of tax actually depends on the following:

* Dependency ratio in a country

* Savings rate

* Birth rates

* Immigration rates that artificially keeps dependency ratio low.

Singapore has the lowest dependency ratio in the whole world at close to 15%, while Japan is close to 45%, which means very small numbers of people have to be supported in Singapore, those that do not earn anything.

The demographic dividend stems from the high savings rate of those at work while the number of dependents per capita remains low.

For India the dependency ratio is somewhere in between, the savings rate remains high and birth rates have remain steady. These are good indicators and if the current regime is focused on working on reversing tax evasion, all the good points would work in favor.

This leaves a sobering thought why Japan has all along worked in the other direction. While their dependency ratio is high and savings rates are high therefore, they have not allowed immigration as Singapore has. It would have been a different story had Japan followed this model.

Coming back to GST, if our current rates of indirect taxation has to be the starting point we would need to keep the starting rate as 18%, for sure. But the direction this has to move is 7%, which shows the tremendous scope for reduction.

Well it could take several decades to reach there, but that is where we need to reach to make opportunities be available to all. The reason why price of goods is high and inflation is high can hardly be tamed by interest rates alone. We must be agile to the long term trends around us that have pushed price of goods way down through lower indirect taxation.

India cannot have a different story line. But that would mean we must be far more competitive to be able to makes goods cheaper within the country and produce them as well as otherwise all that could get imported into India.

If GST rates have to move lower, it would mean we have to climb the ladder of competitiveness.