GST : Less economics, more politics!

Speaking about GST, Modi deemed it as the most significant reform after the scrapping of the Industrial Licensing Act of 1951 in 1991. But it is hardly so

It has often been estimated that what is known, as the black economy is about 70-80% the official economy. This simply means that something to the extent of about Rs.90-100 lakh crores escapes the tax net. If this is captured India’s Tax/GDP ratio will just about double and the government will have twice the budget to spend on development. In theory at least.

There are two big cash streams to the growing pool of the black economy. One is the more commonly commented one, which is by income tax evasion. The other is by evasion of direct taxes like excise and customs levies and sales taxes. There is a third perennial stream, criminal activities. This is a given, even in the more tax compliant states like USA and UK. But tax evasion is a bigger crime in these countries than racketeering. Lest we forget, Al Capone was locked away for tax evasion.

All taxation reforms are meant to ensure better compliance. Full compliance is an ideal. In the recent days the government has logically extended the Aadhar and PAN rollouts by interlinking them. This is meant to make income evasion more difficult. We will have to wait some more to see if our native genius has found ways to circumvent these steps? The GST Bill is the other hand that is meant to squeeze more out of our recalcitrant corporate and business citizens.

Prime Minister Modi rightly wrote: “The rollout of the goods and services tax (GST) on 1 July will, in a single stroke, convert India into a unified, continent-sized market of 1.3 billion people.”

Speaking about it, he deemed it as the most significant reform after the scrapping of the Industrial Licensing Act of 1951 in 1991. But it is hardly so. The essence of a true reform is to unfetter the process, whether it is setting up or running an enterprise or getting a passport. This the GST rollout, as it is now, doesn’t.

But is a bold move that has been in the making for seventeen long years. It overcame many obstructions (most notably by the then Gujarat CM, Narendra Modi) but also got transformed from a simple two-tier taxation structure into a somewhat unwieldy policy with half a dozen levels. Instead of reducing record keeping and paper work (even if its entered by computer and internet). However, it holds the promise of vastly reducing leakages from what had become an extremely corrupt and clumsy system. Essentially, the world’s third largest economy (by PPP) is to transform itself by removing internal tariff barriers and collapsing 17 central, state and local body taxes into a single GST. This should, hopefully, hugely add to government revenues and provide it with much needed funds to invest in building and rebuilding infrastructure, stimulate demand and production, and most of all create the tens of millions of jobs to keep millions of hearths and hopes lit.

Corporate and consumer expectations of the tax reform, which some economists say could add between 1 and 2 percentage points to India’s annual growth rate, are high. Revenue losses will be all but over. But there is another kind of revenue loss we need to be worried about. Tax evasion is India’s biggest business. The earlier web of excise, customs and sales taxes created a system where huge revenues were foregone by the state, and huge revenues accrued to the tax officials at the Centre and in the States. They will do everything in their power to make the simplified system even more complicated. Unfortunately the unambiguity of the language required in the regulations framed is missing. There is still much scope for bureaucratic interpretation and discretion.

There are other glaring inequities. I will just cite one. The sports goods industry, which is mostly located in Jalandhar and Meerut directly, employs about half a million persons. The sports goods market in India is valued at US$ 3.6 billion. The market is growing as 35-40 per cent a year. The growth is expected on account of increasing awareness about health and fitness in the country. India also exported sports goods worth around US$ 400 million as compared to US$ 214.95 million in 2012-13. The major items to be exported during 2013-14 includes inflatable balls, cricket bats general exercise equipments, sports nets and protective equipment for cricket.

Now consider this. All the sports bodies and their members like players and coaches can directly import sports goods with attracting any customs duty. But Indian made sports goods will entail payment of a GST of 18%. This will effectively remove any competitive advantage they may have. Take the case of table tennis tables made in India. The GST Council’s notification based on its June 19 meeting indicates that under its notification 146/94 government bodies, sports federations or specified sportspersons can import them (mostly from China) without attracting any import duty or IGST.  But if the same set of buyers were to buy them from local manufacturers it will entail a GST of 28%. Similarly sporting goods like cricket gear, hockey sticks and soccer balls will become cheaper than Indian manufactures. Make in India will soon become make in China, or Pakistan or wherever, but not here. Is this what Arun Jaitely wants?

Sachin Tendulkar's son will be able to import his cricket kit from England, while a middle or lower class kid from Saharanpur or Ranchi will pay more for Indian kit. Is this the new equity? Its bad enough that luxury cars will attract lower GST and be cheaper while the converse is true for mid range and small cars. Even worse environmentally friendly hybrid cars will cost even more. This is clearly indicative of the lack of preparation. It is true there have been some reduction in small and midsized car models. But I suspect that this has more to do with getting rid of the large back up of unsold stocks. In June this year car sales decreased by 8%. It seems some companies like Maruti Suzuki (50% market share) are making a virtue of necessity.

Taxpayers are already complaining about the sheer volume of additional record keeping and number of forms to fill. If these were essential than arrangements should have been made to train and prepare. Such a gigantic reform rollout requires a huge preparation. The Modi regime is once again trying to do what it did with Demonetization where it turned a straightforward money exchange scheme into a huge economic hole. Once again we are seeing patently inadequate policy implementation, with not all stake holders being brought aboard on the new steps, there will be a surfeit of confusion that will slowdown economic recovery.