By Nandan Nilekani and Viral Shah
In the run up to this year’s budget finance minister Arun Jaitley said, “GST has been supported by most political parties and I am sure others will also see reason and this law will become a reality very soon. Reform is a continuous process and there is no finishing line. It has to go on because challenges keep coming up.”
Every single budget speech in the last six years has mentioned GST. By some measures, we are closer to GST than we have ever been, and by others, we are as far as we ever were. If the yardstick for measurement is passage of the GST legal framework, we have made little progress. If the yardstick is all the hard things such as overall design, stakeholder buy-in, readiness, institution building, and technology, we are quite close to launching GST. The question naturally arises – should GST wait for the law? The answer is an emphatic No.
In 2009, the Empowered Committee of State Finance Ministers put out its first paper on GST. In 2010 the Empowered Group on IT for GST, headed by Nandan Nilekani, proposed the IT Strategy for GST. This solution consisted of creating a professional company, the Goods and Services Tax Network (GSTN), to manage the technology for GST. The ownership structure of GSTN would include the central government, all the state governments and various other institutions.
A key part of the IT Strategy was that the technology development could get a head start, while the political establishment finalised business rules such as tax rates and exemption lists. This design was unanimously accepted by the Centre and all states, and the GST Network was announced in the 2012-13 budget speech and created shortly thereafter. Over the last few years, the GSTN has made substantial progress towards technology readiness. GSTN is a fine example of cooperative federalism.
Most steps towards GST readiness can be taken through executive decision. The excise and service tax arms of the Central Board of Excise and Customs (CBEC) in the finance ministry can be merged. Combining excise, a tax on goods, with service tax will present many conceptual difficulties which can be ironed out. State VAT which is a tax on goods is actually easier to integrate. Then the GSTN can offer a state of the art VAT system, which is future compatible with GST, to all states on a opt-in basis.
A common gateway for payments of both central and state taxes, and common taxpayer registration can be done right now. At least 15-20 states will be happy to implement this solution. When the law is passed, GST can be enabled with far less disruption.
The combination of invoice matching from a state of the art VAT system with data sharing, which can be done by GSTN in partnership with CBEC and the states, will give a huge boost to tax collection at both states and Centre, and show the power of cooperation. After all the real issue is not about autonomy, but to simplify taxation for businesses, and fight tax evasion.
Synchronous design, where everyone has to agree to everything at the same time is almost impossible to implement. Either everyone comes on board or nobody does. In government, the key to success is to design asynchronous systems, so that participants can come on board at their own pace, and the progress of many is not thwarted because of a few. While the GST legal framework is synchronous, the actual design and implementation through GSTN is not. GSTN can on-board states one by one, modernising their VAT systems, and states with well-developed VAT systems can join later.
Laws are the software that drive society. Just like software takes time to develop, so do laws. All laws, especially around taxation, should be simple enough that they can be expressed as software. Eventually, while tax rates and exemption lists are simply values in tables that are easy to change, the software rules that are embedded in the GSTN will be sticky. We believe that laws can be finalised even as implementation starts using a well-designed technology framework and all field and software aspects are well understood.
A similar approach was taken with Aadhaar. Aadhaar reached a billion by having a scalable design that aligned incentives of all stakeholders and was asynchronous in its design. Registrars, enrolment agencies, technology vendors, and even the residents all came on board at their own pace and convenience. The benefits due to financial savings and inclusion convinced the establishment to get the law passed. While the lack of a law curtailed the usage of Aadhaar, the final law incorporated valuable feedback from implementation experience and put Aadhaar on a much firmer footing.
GST needs similar out of the box thinking. It will lead to the economic integration of India, smooth movement of goods, realise Make in India, and lead to our overall prosperity and well-being. The lack of a law ought not to prevent all these good things from happening. If the law is passed, this work will make the world’s largest business process re-engineering project much simpler. If not, upgrades to existing archaic systems will be welcomed by one and all.
Nandan Nilekani headed Infosys and is former chairperson, UIDAI. Viral Shah is co-inventor of the “Julia” programming language