The long tale of GST

The GST will reduce the workload of tax officers enormously by imposing levies on only the last party in the chain.
A man of inexhaustible energy and enthusiasm, the Prime Minister has asked the central tax departments of direct and indirect taxes to double the number of taxpayers. He has an enormous following across the country, but it is doubtful whether his admirers are going to thank him for his bright idea. He seemed to be of the view that his revenue officers are lazy: he told them that there were 42,000 income tax officers, but that their scrutiny of income tax returns brought in only 8 per cent of the revenue. He showed his familiarity with internet: he worked out that many more people searched the internet to find out how to avoid taxes than how to pay them. He must be one of the handful of exceptional Indians who enjoy paying taxes. And that is because he has minions who make it easy for him; it is likely that his taxes are deducted at source, and that he never has to give it a thought, except perhaps when signing his tax return once in a year.

As a tax enthusiast, he must be elated that the Goods and Services Tax (GST) is almost done. It was stuck for ages because Tamil Nadu did not like it; none of Arun Jaitley’s wiles or Amit Mitra’s arguments made its finance minister budge. It may have something to do with the unending saga of its chief minister’s brushes with the tax authorities. But it could have had a more rational explanation. Essentially, the move from value added tax to GST is a shift from taxing the first party in the chain of production and distribution to taxing the last party. Tamil Nadu, being one of India’s most prosperous states, has numerous last parties; each of them will now have to get ready to get registered with tax authorities, to submit tax returns, and to make themselves the victims of the taxmen whom the prime minister so passionately urged to pursue tax victims more vigorously.

Whatever the prime minister may wish, though, the GST can reduce the workload of his tax officers enormously. GST will make possible for them to levy the tax on only the last party in the chain. If the parties that precede him pay the tax, they will be required to pass on the proof to him, and he will be able to claim a deduction or a refund. Whether he does so or not, it is enough for the taxmen to chase the last man in the chain; the number of returns they must check can fall enormously. The finance minister was obviously unhappy with this; he and his state counterparts have brought down the turnover cutoff enormously, so that their tax babus can bring more people into the tax net. Ever since he took office, he has been trying to increase the workload of tax collectors; to that aim, he has added all kinds of cesses, and done his best to complicate the tax system.

This is the wrong way to go. All over the world, tax authorities have put their energies into simplifying tax systems, making tax payment as easy as possible, and taking harassment out of the system. This is not a matter of addressing tax officials once a year and telling them to be nice to taxpayers; it is a matter of devising systems that make tax payment painless. Simplifying taxes is only one of the means. Another is to reduce the frequency of tax payments and introduce flexibility. India is notorious for the excessive number of fixed dates by which taxpayers have to deposit various amounts, generally unrelated to the final tax. That is not the only way to manage central finances; instead of forcing taxpayers to give arbitrary loans to himself, the finance minister can borrow for short periods from the Reserve Bank and repay the loans as tax revenue comes in. RBI already administers a market in which banks can buy and sell government loans; now that a pliant governor is likely to replace Raghuram Rajan, he will happily let the finance minister raise fresh loans in this market.

The writer is a senior economist and was chief consultant in the Finance Ministry from 1991 to 1993

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