GST: A One Nation, One Market Ideal is No Panacea, The Devil Lies in the Details

Written by Anand Teltumbde | Published on: July 10, 2017
The most crucial aspect of this tax regime is the rates of GST for the various categories of products. It is generally experienced that GST tends to be inflationary. For instance, Singapore saw a spike in inflation in 1994 when it introduced the GST. In India, the rate for revenue neutrality was being discussed at 27% and although the standard rates have been pegged lower at 5, 12, 18, 28% being for some luxurious and demerit goods, there is an intrinsic tendency for them to go up once the new regime is stabilized and political antennas are deflected away from GST.

GST



As this gets into print, GST (Goods and Services Tax), which was being talked about since 2000, when it was first mooted by the Vajpayee government, would have been rolled out, adding one more feather in the crown of Narendra Modi. Implementation of GST is being euphemistically projected as the biggest tax reform after independence and hyperbolically compared with the political unification of India brought about by Vallabhbhai Patel in 1947-48 with annexation of princely states. GST is said to bring about economic unification in the form of a single market. When Manmohan Singh led UPA sought to do the same, way back in April 2010, it was the BJP which opposed it tooth and nail.

The UPA presented three drafts of the Bill thereafter but the BJP remained adamant in its opposition. Yashwant Sinha, who was the Chairman of the Parliamentary Standing Committee, had said that GST should first be implemented at central level by merging the central excise and service tax. He insisted that the center should “present an example to the states that this is how we do GST and then the states might follow." Modi, who was the chief minister of Gujarat then, represented the opposition of the states. In a complete somersault, his party and government today are going gaga over GST being rolled out.

There may not be much dispute about the desirability of a simplified tax structure in the form of GST, but it all depends how it is structured and implemented in a subcontinent sized India with its diversity and constitutional complexity. While it may be apt to look at these aspects of the recent GST roll out, it is more pertinent to fathom political agenda of the BJP that stalled it for the last seven years, but has pushed for its expeditious roll out defying wise counsels of experts against the risks involved.

GST is No Panacea
No doubt, as a concept GST is a good idea as was first conceptualised in 1920s as destination based tax on consumption of goods and services by Wilhelm von Siemens, a German businessman. It was first introduced in France in the year 1954, followed by the countries like Japan, South Korea, UK and Australia. By now, 161 countries in the world have GST in place, which makes India the 162nd. It should, however, be noted that GST is not the same thing across these countries, there being more than 40 models of GST presently in force. The GST is undoubtedly great for the large businesses, and the Union government, but it is not necessarily so for the states and the people. If abolishing state taxes under GST was the sure way of creating efficient markets and economies, one would have expected the United States – the largest capitalist economy in the world or the second-largest common market in the world, the European Union, which came into being in recent times, to have at least considered GST for themselves. But they haven’t. In unitary countries (in which the central government has ultimate and full powers), Value Added Tax (VAT) is itself GST, whereas in federal countries (countries like India having both central and state governments) they become different. The model of GST India adopted is the dual GST model followed by the only country, Canada. How these relations between the states and the center are structured in the GST scheme assumes paramount importance. 
Expectedly, Finance Minister Jaitley proclaimed GST would lead to 2% increase in GDP. He perhaps did not know some other people and agencies have even exceeded his prediction. The Fed research note stated that assuming the aggregate weighted GST rate is 16%, there would be positive impact on real GDP of 4.2%. The International Monetary Fund (IMF) had predicted GST to help raise India’s medium-term GDP growth to over 8%.  The World Bank said, a smooth implementation of GST could boost economic activity to push GDP to 7.2% in 2017-18 and further to 7.5% in 2018-19. Even our own NCAER also projected 1-2% increase in GDP due to GST. All these predictions are based on reduction in inefficiencies in the production process while eliminating the current compounding effect of different central and state levies. One need not discount this approbation by the global capital, but one could make a note of caution that they do not take into account the complexities the Indian situation poses.

Devil in the Details
The most crucial aspect of this tax regime is the rates of GST for the various categories of products. It is generally experienced that GST tends to be inflationary. For instance, Singapore saw a spike in inflation in 1994 when it introduced the GST. In India, the rate for revenue neutrality was being discussed at 27% and although the standard rates have been pegged lower at 5, 12, 18, 28% being for some luxurious and demerit goods, there is an intrinsic tendency for them to go up once the new regime is stabilized and political antennas are deflected away from GST.

When one speaks of inflation, it follows which classes it hits most. Many items of mass consumption previously available without tax having been brought under the ambit of GST, whether the new tax regime achieves revenue neutrality or not, it is likely to hit the poorer strata hard. Many countries recognizing this fact had instituted price control mechanisms when GST was introduced. For instance Malaysia, the latest country to adopt GST, was able to mitigate the risk of inflation on account of the GST with price control, administered by the Ministry of Domestic Trade and Consumer Affairs. In India there is a provision of Price Monitoring Mechanism (PMM) in the GST Act, but the experience shows that such mechanisms utterly failed to control prices and rather contributed to corruption.

The political problems which have been placated with the assurance that the states would be compensated for their revenue loss every quarter up to five years from a fund of Rs. 55,000 crores created with levy of a cess on Luxury and demerit goods, is a temporary truce.

In the Indian system, the state governments do most of the actual governance. They administer the police, run schools and hospitals as well as look after India’s most-critical sector: agriculture. Under GST, the states do not have flexibility to raise tax except through the GST Council, which, according to its constitution gives the center veto power against states. This disconnect between services and taxes in any federal country is theoretically bad but in India, it may get worse due to her diversity. GST straightjackets all states with same taxation system, granting them equal votes, undermining the reality that there is nothing similar among Gujarat, Tamil Nadu or Jharkhand, and Tripura. One may surmise that the divorce of states from the process of taxation may prove to be a recipe for disaster in future.

GST surely brings supply chain efficiencies in manufacturing but being the destination tax, it has intrinsic disincentive to the manufacturing states. The state like Tamil Nadu, India’s manufacturing hub, for example, had opposed the GST precisely due to this reason, as it saw a revenue loss of around Rs 9,270 crores under GST. If one aggregates it in the context of states’ inability and unwillingness to attract investment in manufacturing, it may outdo the process efficiencies and become a veritable economic disaster. Already, the states’ revenue anxieties have resulted in keeping sectors like alcohol, tobacco and certain petroleum products out of GST for an uncertain length of time. The present high taxation structure for them is to continue. The consequent break in GST credit chain at either end of the supply chain will entail substantial cascading burden which is surely not factored in the ecstatic predictions of the GDP. Then there are sectors in India where the entire chain of production is done without any tax payments and necessarily in cash and so also the markets in cities (not to speak of villages) across India, where business thrives without any trace of documentation or credit payments. Another factor is resourcefulness of India’s trading and intermediary class to beat the system. Their ingenuity in squirreling all their illegal incomes into nearly 18 lakh dubious bank accounts with average deposit of a whopping Rs 3.3 crore during demonetization is a case in point. This core constituency of the BJP need not be underestimated in defeating even the GST regime.

Onward to Hindu Rashtra
The haste with which the BJP pushed this project within less than nine months (as against 18 months in the case of a small country like Malaysia) indicates how keen it is in seeing it through. The experts kept on wondering about the state of readiness of the millions of businesses, the banking system, and the IT backbone in the form of the GST Network. But with the same recklessness and bravado as displayed during demonetization, Modi has set the target to roll it out on 1 July. Like all his schemes, GST also may raise the dust and the rest would be managed by the Indian jugaad. The polarized polity is there to uphold any and everything that Modi does.
The BJP unlike any other party (including communists) has a definitive ideological agenda behind its every significant move. The economic discourse on GST tends to miss out that it constitutes an important piece in the political construction of its Hindu Rashtra.

GST helps in homogenizing India, a la ‘one nation, one market, one tax’, which indeed was its slogan for GST. Alas, the ground realities led it to compromise and reconcile with a dual GST model and a very complex system of four rates and additional levies, that removed ‘one rate’ from its slogan.

But even the remaining one (one nation, one market) is indicative of not only a confluence of Hindutva (nationalism) and neoliberalism (market) but also reminiscent of Hitler’s “ein reich ein volk ein führer”, much adored by the Sangh Pariwar. GST in the current shape, irrespective of whether it succeeds or not (Modi is capable of making even his worst failure seem as grand success as he did in demonetization), is a big leap towards the Hindu Rashtra.  

(A version of this article also appeared in the Economic & Political Weekly) 
 
 
 
 
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The views expressed here are the author's personal views, and do not necessarily represent the views of Sabrangindia.