A good law is being held hostage by its makers
Now that the budget session is upon us, the focus has turned again to GST—billed as a move that can take India into the top 100 countries in the Ease of Doing Business index—with the same vexed question in everyone’s mind. Will the political interests dovetail to get GST off the mark now or will India have to wait for more years? Given the tortuous history of policy making in India, be it in the case of 1990s’ liberalisation, the civic nuclear deal with US or FDI in retail, insurance, etc, such scepticism is natural.
GST has been adopted by more than 160 countries because of its many advantages, a key one being an in-built structure which facilitates generation of a third-party paper trail on transactions between firms making it difficult to hide them. When transactions can’t be hidden, incomes can’t be hidden or tax evaded. Some estimates show, GST would add about 0.9% to 1.7% to India’s GDP—a gain of about R1,12,870-2,12,200 crore at FY15 prices—and boost exports by about 3.2% to 6.3% by making it ‘zero rated’ as exporters would get full credit of non-off set component paid and the impact of un-rebated taxes (mandi tax, Octroi, entry tax) would be nullified.
However, it is a regressive tax—the poor pay a higher tax than the rich. Global experiences show that it leads to inflation in the short run. India would need to find income supplementary mechanism to help the poor by continuing with PDS and DBT and exempting essential products and services from GST.
Interestingly, there is no ideological difference over GST. No political party is opposed to it. The states did object initially on the grounds of losing revenue and fiscal autonomy but that is no longer the case. Equally or even more critically, the businesses are all for it. Sure, the services sector will be hit if the GST rate is fixed at higher than 14.5%, which is more likely, but this sector has no consolidated industry voice even though it contributes the most to the national income and second most to the employment.
Sure, there are differences over tax rate. The Congress is insisting on capping GST at 18% to prevent a higher tax burden in future while the government wants to keep its options open. Worldwide, GST rates ranges from 6% (Malaysia) to 27% (Hungary) and there is no reason why this issue can’t be settled through constructive debates.
The real reasons for the delay of GST could be far more complex. One could be its effectiveness in a federal structure when US, the epitome of federalism, has kept itself away. A finance ministry report on GST (of December 2015), gives expression to some such concerns. It says that other large federal systems like EU, Canada, Brazil, Indonesia, China and Australia face serious challenges. Some are overly centralised, depriving the sub-federal levels of fiscal autonomy (Australia, Germany, and Austria); where there is a dual structure (as India is to adopt), they are either administered independently creating multiple tax bases and rates weakening compliance and making inter-state transactions difficult to tax (Brazil, Russia and Argentina). None of them has managed to overcome these disadvantages and India too needs to find its own answer within its cooperative federalism.
The other consequential effect of GST is on black money. As inputs and outputs get into a paper trail monitored separately by the Centre and states, it brings down transactions conducted in black markets. Given the role black money plays in businesses or elections, are all stakeholders ready to give up the power and benefits derived from the black economy?
Then there are technical issues such as calculating value additions by intermediaries, seamless input credit, administrative and logistics infrastructures, training and education of consumers and producers which are time consuming exercises. The signs of preparations are not palpably visible yet.
But a far more serious issue could be the short-term inflationary impact of GST. Most international studies show that prices go up in the initial months of GST. It happened in Malaysia, which adopted it in 2015, despite elaborate planning and months of preparations. Malaysia kept essential products out and assigned zero tax to others to keep prices in check and yet prices of all categories of goods and services went up. Australia faced severe political turmoil. The party backing GST lost the 1993 elections (‘referendum on GST’), went on to win the next one after promising ‘never ever’ to support it. But it did so and almost lost the very next election (in 1998, under John Howard).
Though the finance ministry says that a revenue neutral rate of GST (it proposes 17-18%) would have ‘no aggregate impact’ on inflation, it isn’t ruling it out either, arguing that the weights of commodities in the consumption basket (on which the CPI is based) are different from their contribution to indirect tax collections.
Could GST’s inflationary tendency prove its undoing given the sensitiveness over inflation and centrality of elections to India’s polity now? It could be. Take 6-12 months needed to get approval of the states and ready the legal framework and add 1-2 years as the inflationary stage (as the government anticipates) and India would be bang in the middle of the 2019 elections when inflation hits. There are several state elections on the way too.
Like all reforms, there are a number of articulated reasons for alternative paths and strategies to law making but an endless national debate over a decade is counterproductive to our national interests. Global experience shows that GST is a good tax policy to adopt and works well for developing income economies and their people. Besides, no reform is an end in itself; it is always a work-in-progress. GST would, like any other reform, need improvements and course corrections.
It is time we put the debate on what constitutes a perfect GST law to rest and implement as the benefits to the nation outweigh the costs and should be a collective political achievement of our democracy.
Dutta and Mohanty work for Thought Arbitrage Research Institute, a not-for-profit research think-tank based in Delhi