Last night as the clock chimed twelve, India entered the all new GST regime. For close to fifteen years since it was suggested, it has been discussed, opposed and supported. It is now a reality.
A few of my friends wanted me to write my views on the GST. So I kind of compiled some connected and unconnected musings of my own
Culmination of Long, deliberate and steady Tax Reforms
In 1991 when Dr. Manmohan Singh ushered in Liberalisation and Economic reforms marking the movement of India from a socialist economy towards embracing a capitalistic one. One of the first areas to come under the reform hammer was the taxation regime. From a direct tax regime (Income tax) that used to tax at ridiculous effective rates of close to 70+% we have a far more rational Income tax regime now. 
Similarly, the Indirect regime was first rationalised - meaning the rates were made more practical (one still remembers that Ravi Shastri who won an Audi as the Champion of Champions reward at the Benson and Hedges cup tournament in Australia was unable to bring it back to India because he was expected to pay more than the price of the Audi itself as the import duty for the gift that he got free) - in phases.
Then, the cascading effect of taxation at each stage of value chain was gradually addressed by bringing in the Value Added principle(VAT), which also happened in stages. We heard and used the terms CENVAT, MODVAT and VAT.
Meanwhile Service Tax was also introduced as Services took increasing share in the GDP. And since its almost unheard and untalked of entry way back in 1994, it is now a source of Lion's share of Government's tax kitty.
As the GDP of India multiplied 40 times from a meagre Rs. 5.86 Lac crores (nominal GDP) in 1991 to a an impressive Rs. 135 Lacs crores by 2016 - the tax regime had its own problem of administering the sheer size despite it growing more rational and simpler.
GST was suggested as the culmination of this process - expected to result into (a) Value Added Taxation in the true sense of the word
(b) One form of Indirect Tax getting rid of so many offshoots at both central and state level
(b) One form of Indirect Tax getting rid of so many offshoots at both central and state level
(c) increased size of the formal economy.
After more than 15 years of consultation and debates it is now a reality. In many ways then it is a historic success of consistent movement across governments and generations towards improving the taxation regime of the country. That the, telecom, data and Internet revolution happened in the mean time is a fact. It ensured that the GST finally happens in a shape that not even its originators would have imagined way back, is an added advantage. The GST will probably first such reform in India that will be executed on a fully IT enabled backbone.
So, is it good for the Economy/Country?
There are many, many goods to the idea.
One Tax
That there should be one integrated indirect tax in a country is an obvious good about the idea. It should/must simplify tax practices for the business in general as it currently deal with a web of indirect taxes at different levels coming across multiple and overlapping authorities. It should also increase business productivity as one expects to reduce delays and red tape in the tax administration system. It also should address the problem of tax cascading effect due to non-integration of Goods and Services and also due to differentiation of sales, Excise, various duties etc. However, there is probably more to it than just getting rid of the entry barriers at each state border and maybe even at the entry points of a few cities.
Challenges
As always the devil may be in the detail. As the GST went through its trials and tribulations - the form in which it is finally getting implemented may be a fairly complex one. Almost seven plus slabs of taxes with three types GSTs makes it a little difficult to understand. This may be the first barrier for small businesses to embrace the tax system and people may try to find a way out of the system if its compliance is tedious and costly (both of which it appears to be in the first look). More on this later. :-)
Less Tax Evasion
Our country is notorious for bypassing the tax system and it is believed that there is a parallel informal economy outside the indirect tax net, probably as large as, if not larger than, the formal economy.
GST has an inbuilt incentive to comply with the tax system as it implements the VAT principle of letting the businessmen pay tax only on the Value Added (which in simple terms is difference between the sales and cost of the good) across goods and services (integrated). One expects then that the businessmen will be more amenable to sell all goods/services billed and so it should dent the parallel informal economy.
Challenges
The jury remains out on this. One needs to appreciate that tax evasion galloped due to two reasons - one was irrational and ridiculously high levels of taxes, so much so that tax evasion was the only way businesses could have remained profitable at one point of time. The other was a corrupt and decayed tax administration system where the officials were more interested in harassing the tax payers and generating instances for them to get bribes. The increased cost of doing business due to this was an incentive for business to bypass the tax system.
While over the decades the tax structure has become increasingly more rational (and it continues to move in that direction) little or nothing seems to have been done to fix the babus for whom corruption has settled in as a culture. And this remains the biggest question mark on how successful will GST be in preventing tax evasion.
While over the decades the tax structure has become increasingly more rational (and it continues to move in that direction) little or nothing seems to have been done to fix the babus for whom corruption has settled in as a culture. And this remains the biggest question mark on how successful will GST be in preventing tax evasion.
The nut and shell of it is - GST may not be able to address tax evasion much if the cost of evasion remains less than that of complying with it and till evasion is simpler than compliance. The tax rates seem to be pretty high and add to it the increased cost of compliance due to increased paperwork and one is looking at a possibility that the intent may not be so easily realised.
Better Tax Administration
Many readers will jump on me when they read the above criticism about tax evasion. The counter is that the GST is being implemented on a digital backbone of Internet based reporting and reconciliation system which will make tax compliance almost a compulsion and will also help track tax evaders better.
Many readers will jump on me when they read the above criticism about tax evasion. The counter is that the GST is being implemented on a digital backbone of Internet based reporting and reconciliation system which will make tax compliance almost a compulsion and will also help track tax evaders better.
It is pointed out that "Invoice Matching" using the IT backbone will ensure that there is very little space for tax evaders to escape the taxman's eye. It is expected that the tax to GDP ratio will grow because of this development.
Challenges
One is entitled to a fair question here. What do we mean by better tax administration. Does it mean easing ways for the honest tax payer and making it hell for the dishonest one? I would think yes - this is what it should mean. Should it mean - making it convenient for the taxman to do his job? I would think not necessarily.
If so, there remains question mark on whether the current form of the GST meets/will eventually meet the aim. The structure of the GST seems to have put the onus of grouping the goods and services into various categories and finding and applying tax rates on them, reporting it clearly in defined formats, even working out the central and state share in that tax, to connecting the invoice of input costs for which credit is asked for, on the business and businessmen. Over the years the approach to Governance has tended to shift the clerical work of the Government to the tax payer.
In such an environment, the job of the taxman may get focussed on the mismatch or default in reporting and then regulating/punishing the businessmen to ensure better compliance. Read in the above line the greatest risk the GST faces today - a possible return to the Baburaj that was reduced over the two decades of Liberalisation. Businessmen harassment by the Babu may be back on the table. A simple example is that a Babu may come knocking at your door for you may have defaulted/delayed in one or more of filing of the 37 returns annually mandated for you.
In short, the government must focus on ensuring that the Babudom does not abuse the new found authority they have otherwise there is great risk of the intent going haywire. In my humble opinion the bureaucracy remain the biggest risk to the success of the GST.
In short, the government must focus on ensuring that the Babudom does not abuse the new found authority they have otherwise there is great risk of the intent going haywire. In my humble opinion the bureaucracy remain the biggest risk to the success of the GST.
Disruptive Change
One of the goods of the GST is that it brings about fundamental changes in the way both businesses and government deals with indirect taxes. It is like we are recreating the taxation regime into something all new.
One of the goods of the GST is that it brings about fundamental changes in the way both businesses and government deals with indirect taxes. It is like we are recreating the taxation regime into something all new.
One of the universal positives of disruptive change is that it gets rid of old mindsets and old practices - trashing in its vain the old corrupt or bad practices. Such disruptive change gives the honest and upright elements in the Governmental system to assert themselves and help the system take a more positive, cleaner shape. GST is one such opportunity for the entire system.
Challenges
The biggest challenge to disruptive change is people. Old mindsets remain in the heads of the people and not in files, papers or systems. The fact is that people in charge of executing the change to the GST remain the Babu who has lived in legacy system for decades. There first instinct is to safeguard themselves from taking clear and firm decisions and the second is to find ways to make that extra buck. To them, changes like GST with its detailed systems of reporting and reconciliation is a God sent opportunity.
Lets hope that the Government has taken steps to ensure that it will not let the babudom derail the reform by wrapping it up in red tape, harassment and legal technicalities. It is however going to be a tough task.
The Political AngleIt is easy to suggest that Modiji and his Govt. burnt the midnight oil, worked out compromises and ensured that the GST meets its deadline. It managed the toughest part - that proverbial "last mile". To some extent this is true as well. Modiji/Jaitley's resolve has played an important role in ensuring that the reform does take place.
However, it will help the cause of balance to recall that everything that made this possible (Aadhar, digitisation, GST itself) was blocked and delayed by those very people who are now the torch bearers of the initiative and who now claim to have transformed the country. Revenue neutrality to the state was always on offer, but BJP ruled state under the UPA regime steadfastly refused to buzz. They did so to protect the small business lobby - those very loyal voters of the BJP whose support - the party has taken the gamble to risk by implementing the GST. Who is opposing the Govt. most on this step? Their most loyal vote bank of the traditional small businessmen.
The BJP and its "chankya" is counting heavily on the support of the young and impatient population of the country who are voting for it. The BJP has been successful in doing that till now as most elections have shown till now. So as long this particular segment of the voters are solidly behind the BJP they have little to worry about winning elections. The midnight launch of the GST is just one more of the series of events that gets unveiled to keep this section of society engaged and hopeful. Remember the Lion of "Make in India" unfurled and maintained for more than a year in these young minds. It has been gradually shifted to new symbols and new slogans because that works best with is segment. They forget and move on easily - the Fast Track generation.
Quite characteristically, the Modi government has been able to build a hype around the GST too. Many followers believe it to be a cure all for corruption, black money and decayed tax system all packaged in one. They may be in for another surprise as they will see the next two years of teething troubles and constant tweaking of the system bringing in confusions and disappointments, before it settles down to a more practical system which may or may not achieve these high sounding goals.
Now, to the above, may I add, that I have always expected that people will be surprised by how little the hyper promises of the Government will actually end up achieving. But the supporters have always amazed me by being super loyal to Modiji, despite in the face evidence of sure shot hype and then taking U-turns on many issues. In fact many believe this to be the natural and necessary way of getting things done. What Modiji has been able to successfully do to them is open up new bottle, turning out a new genie everytime. It helped supporters focus on the new genie and to move over from the earlier one. GST is yet another which will make them forget Make in India, skills India, Demonetisation, Pakistan etc. for some time at the least. To that extent, the constant zest of Modiji to keep doing something or the other is to be admired. Modiji has been a successful charmer till now who has been administering a bitter pill and still make people feel that they have been given a chocolate that will eventually be sweet. In the long run........
The opposition on the other hand remain a sad and hopeless story of its own. Whoever, in the congress thought of boycotting the session on launch of the GST remain blind to the fact that the Congress has failed to register its body of work that the Modi government is deftly using to build on. The boycott may only help people forget them faster. As I have been saying this consistently - sonia/rahul must now resign and pass on the reins of the party to whoever has the capability of winning the imagination of the party workers - and that person does not seem to be Rahul Gandhi for quite some time now. If at all they have any chance to regain some political space it is to milk the resulting disruption that will take place in the coming one to two years as the GST is rolled out on the ground.
Final Thoughts
It's good that GST is now a reality. It is a step in the right direction. It is also a baby step in a series of such steps that the country took over the last two and a half decade. It is an opportunity for the country and the Government to speed up economic growth.
As a supporter of the idea of the GST - I am little pained by the complexity it has achieved in its launch avataar and the kind of uncertainties it has resulted into - at least in the short term. There remains bigger challenges - bringing petroleum, Alcohol, Education, Healthcare in the GST ambit. Increasingly government will come under pressure to act either ways.
At the same time we must understand that anything so fundamentally different will come as a compromise package - the trick is to gradually take the initiative towards its intent. Do recall that Dr. Manmohan singh ushered in the era of Foreign Investment packaged with back to back agreements committing equal amount of exports from the country. The nation seems to have forgotten all about that - but FDI is now a reality and higher FDIs are touted as achievement by the Government of the day.
The problem will be that government will find it tougher and tougher to maneuver as they face citizen ire over teething troubles. Then there is that proverbial sword of inflation hanging - one does not know clearly whether this will lead to increase or reduction in inflation. To my mind, if GST will actually bring more of informal economy into the formal one then it should surely lead to increase in on the ground inflation even if it is not reflected in official numbers because may be it was never a part of that data.
In summary, GST will most probably succeed like Aadhar is now succeeding. How effectively it is implemented will decide how long it will take before it settles down in the veins of the country. The challenge for the Government is to ensure that it does not settle down into another web of notifications and clarifications making things further complicated. Instead steady and resolute movement towards further simplicity and fairness will make it really a game changer. Will the Government be able to achieve that - only time will tell. Tighten your seatbelts - enjoy the ride and pray that the drama that unfolds actually touches your lives positively.