Strange GST slabs as they affect Development and Defence

India's Finance Minister Nirmala Sitharaman arrives to present the 2019 budget in Parliament, New Delhi, India July 5, 2019. REUTERS/Adnan Abidi - RC11D7AF71F0
[Finance Minister Nirmala Sitharaman on the way to presenting her first budget]

There has been only a notional increase in Finance Minister Sitharaman’s defence allocation. It may not be sufficient to deal with even the rate of real inflation, what to speak of price tags on military hardware that gallop at almost a geometric pace.

There’s one aspect of the general budget with impact on defence acquisitions that Sitharaman did not clarify — whether the amendment of the slabs in the existing Good & Services Tax (GST) structure will be part of her effort to simplify and streamline it, which is what she promised in her budget speech. Because there are glaring anomalies in the GST slabs that Arun Jaitley created. The sort of absurdities that resulted were flagged in my recent book ‘Staggering Forward: Narendra Modi and India’s Global Ambition’ (Pages 317-318). But here’s reiterating some of them.

The current scheme boasts of numerous and confusing rate-slabs often not aligned with the larger objectives. It was early recognized as being flawed, as they inflated the procurement costs all round. Putting all production machinery in the 28% GST bracket has meant, for instance, that if machinery is bought related to intermediate and capital goods for, say, Rs 100, with GST of 28%, Rs. 128 is lost right away by the buyer. With 3 years as payback period – the average age of a modern machine, where are the funds even under the ‘Make in India’ rubric?

Similarly, if building infrastructure – roads, highways, etc. is a priority for the Modi government, shouldn’t excavators, road rollers, and so on have been in the 5% GST category? Likewise, as regards the Swacch Bharat Abhiyan, sanitaryware attracts 18% GST! Also consider the Jan Awas Yojna (for low cost public housing) – the doors, window frames, etc. that go into a house costing Rs. 2.5 lakhs under this Yojna has a GST component of 18%. Won’t fewer houses be built for the same fund allocation?

In any case, the GST slabs of 5%, 12%, 18% and 28% are arbitrary. On what basis did Jaitley decide 5% for this item, 8% for that and 18% GST slab for ‘services’.

     Now ponder the GST effect specifically on defence production costs. Warships and aircraft are in the 5% slab. But the propulsion system in warships is pegged at 28%, army’s tanks are pegged at 28%, and 3-tonners – the trucks most commonly used to move troops, etc. was originally in the 28% category. Moreover, everything connected with the railways attracts 5% GST, anything connected with space is 0%.

Without the 28% GST more goods would be produced in the country, more people would be employed, the country’s wealth would grow faster and India will progress faster.

If 100 trucks get made now, without GST 128 trucks would have been manufactured, with more impetus provided for steel production, rubber production for tyres, and so on. Worse still is the working capital requirement. The GST rules mandate that an input tax credit can be claimed only when the next producer up the chain pays up. An aircraft is produced in 3 years, so the manufacturer of components, say, has to wait for three years to get paid.

Hopefully, Sitharaman will get round — sooner the better — to ironing out such GST kinks. The armed services will then be able to purchase more of what they want for the allotted quantum of funds. But, more significantly, this kind of a wonky GST system ends up making arms imports cheaper because the global supply chains tied to major foreign armaments makers are not subjected to Indian GST.

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Author: Bharat Karnad

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