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 Goods & 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 of the 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 to invest 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%. In the event, 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, 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.

About Bharat Karnad

Senior Fellow in National Security Studies at the Centre for Policy Research, New Delhi, he was Member of the (1st) National Security Advisory Board and the Nuclear Doctrine-drafting Group, and author, among other books of, 'Nuclear Weapons and Indian Security: The Realist Foundations of Strategy', 'India's Nuclear Policy' and most recently, 'Why India is Not a Great Power (Yet)'. Educated at the University of California (undergrad and grad), he was Visiting Scholar at Princeton University, University of Pennsylvania, the Shanghai Institutes of International Studies, and Henry L. Stimson Center, Washington, DC.
This entry was posted in arms exports, asia-Pacific/Indo-Pacific, Asian geopolitics, civil-military relations, Culture, Decision-making, Defence Industry, domestic politics, DRDO, Great Power imperatives, India's strategic thinking and policy, Indian Air Force, Indian Army, Indian ecobomic situation, Indian Navy, Military Acquisitions, Military/military advice, society, South Asia, Weapons. Bookmark the permalink.

4 Responses to Strange GST slabs as they affect Development and Defence

  1. Rupam says:

    Then there is the reduction in import of defense equipment. This would further embolden the elements in the armed forces that our propped up by the foreign lobby to push for more imports draining the exchequer dry.

    Rather than that, full ban on import should have been put and the armed forces should have been ordered to use on Indigenous weapons and if they were not satisfied then use their heads get together with the engineers and come up with better solutions. Followed by opening the gates to the domestic private sector fully to get into manufacture and also export.

    It would have been good, if our PM and diplomats aggressively marketed the Tejas to Malaysia and by now could have got a good deal for production. More than Malaysia, they should have talked with Japan, Vietnam, Philippines and South Korea for Tejas and Brahmos etc. but none was done what so ever.

    Then there is the criminal waste of money and human resource on Gandhipedia. Like WTH.

    Now it feels like we were better of without this fool in office.

    • You are right. There’s no real alternative to stopping all arms imports instantly — going cold turkey. This is the solution I have long advocated (in my books, other writings, and in posts on this blog) to wean the Indian military from foreign-designed hardware.

      • Rupam says:

        True Bharat Karnad ji, the one thing that irks me is that all those generals and politicians who think that Foreign products are better. When the matter of fact is the we have enough brains and capability in terms of Human potential that should arms import be totally banned within 2-3 years we will have a thriving domestic sector that produces world class products. But for that to happen simultaneous reform not only in defense but education sector is also needed. Who will do that, go figure.

  2. raja says:

    B.SIR,
    TWO QUALITIES ARE IMPORTANT IN LIFE …..FIRST IS COURAGE..SECOND IS WISDOM…
    AS WE AGE COURAGE IS MORE IMPORTANT THAN WISDOM……
    UNFORTUNATELY HERE ….BOTH ARE MISSING……!
    THATS THE REASON INDIA IS NOT A GREAT PWR…!

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