Pratim Ranjan Bose
(Reproducing my introductory remarks at the "GST Conclave" hosted by BusinessLine, in Kolkata, on August 18, 2017)
I can vividly remember the
shock India got from economic liberalisation in June 1991. As I joined the
financial journalism the very next year, I saw before my eyes economic
activities built strictly on closed-economy principles, drowning in sorrow. We
saw big companies both in public and private sectors - like Coal India, SAIL,
Tata Steel - slipping into the red. Over here in Bengal, a Leftist government
was blaming “open door policy” for all ills.
It took at least four-five
years before pessimism was replaced by optimism. Many companies, which slipped
into the red, started getting bigger than ever. Many new companies came, in
much larger numbers than the closed ones, to exploit the new opportunities.
Many jobs were cut in uncompetitive sectors. But new opportunities were created
in much larger numbers. Twenty-five years later, today, no one would talk about
going back to the old regime when one had to wait for years to get delivery of
a scooter or refrigerator and, the makers were reaping harvests of investing in
political capital to get a license.
I presume we are headed for a
similar kind of scenario with GST, barring some exceptions. GST, as we all know
is a consumption-end tax that is to plug the tax leakage and remove the
cascading effect of the tax on product prices as well. It removed the scope of
VAT arbitrage between States. We are aiming to make noncompliance, economically
unviable; as those out of the GST net, cannot avail input credit.
Major reform
Aided with AADHAR based
biometric mapping and IT support, this indirect tax reforms should eventually
widen our thin direct tax base as a large population who evade tax-net under
the cover of cash based activities, should find themselves trapped in. This I think
is the most important long term effect of GST or GST-centric reforms, we are
witnessing.
But all this is not going to
come easy. India for ages built an ecosystem for tax evasion. The humongous
election expenses (a candidate aspiring for merely a corporators seat in
Kolkata spend anywhere between Rs 25 lakh to Rs 2 crore) of political parties,
come at a cost. Tax evasion is one of those costs. According to a Delhi based
transport research agency, 50 % of goods transported by road - including 70% of SME production – avoid the
tax net. You may or may not agree with the number but rest assured that a good
majority of our trade and commerce evade or avoid taxes, creating major social
distortions.
As was illustrated by the
Finance Minister Arun Jaitley during the 2017 Budget speech, the number of
foreign travellers from India; the consumer interest in luxury cars and other
premium products do not justify the thin minority of 24 lakh people income tax
assesses, showing over Rs 10 lakh annual earning. Similarly, barely one-third
of the 14 lakh companies file returns and, only 7781 companies show
profit-after-tax of more than Rs 10 crore a year. Everyone should agree, either
privately or publicly, that their personal experiences do not match with these
official numbers.
Impact on politics
But this is probably the tip of
the iceberg. One of the reasons why real estate is in trouble with GST is, sand
and stone chips – two important raw materials – are controlled by mafias who
operate under political patronage and never cared for the law. What should
builders do now? Sacrificing input credit can increase prices of real estate
impacting market demand. Should they turn the heat on politics to formalise the
sand mining business? Or, should they take a hit on super-normal profit expectations?
Transport is out of GST. But if all goods come under the tax net, transporters
cannot hide their income either. What will happen to their business model built
on tax evasion?
There is another perspective of
this story. India we all know is a Union of States having distinct
constitutional rights. But such a structure proved inadequate to compete with
unitary country structures. You cannot leave it to the prudence of 28 States -
ruled by a dozen or more parties, who have an alliance with another few dozen
parties, each of whom has a different point of view and interests - to make the
life of an investor as easy as in China. GST brought in a unitary tax structure
through the constitutional amendment. Should it be an inspiration to bring
commonality in India’s power distribution sector? This is important to expand
the scope of manufacturing beyond merely half-a-dozen States.
The point I am trying to make
is GST should trigger a chain of reactions or reforms in Indian
socio-economic-political landscape. But unlike the 1991 economic reforms that
had immediate social ramifications; GST is a slow fire that will burn deep but
without making it obvious. You will know the result only later. It means, we
are unlikely to see any impromptu mass reaction against GST, which should make
it difficult for the politics to launch any popular opposition against GST as
they did against 1991 reforms.
Some weaknesses
GST, I presume will surely
improve our Tax-GDP ratio from a paltry 16%, the lowest among BRICS nations.
But, I have doubts if GST in its current format would ensure maximum gains. The
multiplicity of rates, the differences in rates between an air-conditioned (AC)
and non-AC restaurant, or economy and business class seats in flight; are
probably that chink in the armour.
Such differentials, drawn on
the closed-economy cliches; had no reason to survive in the GST era. There was
no discussion on these lines in the past either. Yet they made a last minute
entry. I anticipate it would open multiple battle lines for the tax-collectors;
it would also keep them rooted to the tradition of suspecting business rather
than respecting it. Such environment breeds corruption, which in itself is a
major hurdle in ensuring ease-of-doing-business.
The need was to make it simple but strict and,
eliminate the discretionary power of politics. But we decided to go with such
powers, opening floodgates of requests and everyday changes in rates of items.
In other words, GST though
promises to remove many ills has left at least one basic inadequacy of our tax
and tax administration system intact. I anticipate we have to wait for another
set of reforms to make economic and political life more Swachh (clean).
Right move
Having said this, I do keep
faith in the great Indian resilience. There are criticisms of planning gaps -
like not having planned an anti-profiteering authority well in advance, as
Australia did; last minute announcement of rates denying business time to plan
adequately and the suspense over the e-way bill.
The critics are correct. But frankly
speaking, the country that wastes 17 years in discussing and postponing GST
implementation; cannot expect the roll out to be as smooth as in Australia. To
be fair, given its federal structure, size and complexity; India cannot be
equated with Australia either. We will take time to get rid of the Jugad mentality.
***
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