Whither the Good and Simple Tax?
The nature of the State is such that it is very good at certain things and not so good at others. Revenue mobilization and use of force to maintain law and order are supposed to be functions that a State excels at. The State mobilizes revenue through taxes- direct and indirect. The amount and manner of revenue mobilization largely determines the extent to which the State fulfills its obligations towards its citizens. The Indian State has not been known to be efficient at revenue mobilization with the tax to GDP ratios being amongst the lowest in the world. It was to correct this and with an additional goal to boost the “ease-of-doing-business” factor that the Goods and Services Tax was introduced . The GST aimed to improve the “ease-of-doing-business” factor through the creation of a unified market by breaking down barriers to trade that were created by separate tariffs imposed by different States of the union.
The passing of the GST was considered such a watershed event in the economic history of India, that a midnight session of the Parliament was convened. A reform of this nature is expected to face some teething troubles. Glitches on the technology front, tweaking of processes were par for the course. However, after the dust has settled, it seems that a good and simple tax is still elusive for India . So, where did it fall short and what can be done?
- One nation — one tax: The GST was touted as a means to create a unified market with the dismantling of myriad state taxes and levies. But has this really happened? The myriad taxes were simply replaced by many tax rates. The Indian GST system currently has 4 non-zero GST rates -5, 12, 18, and 28 percent. “Milk and Mercedes cannot be taxed at the same rate in India” was the common argument that was put forth in support of the many tax rates. However, this has made the taxation system complex. Although tax rates are uniform across the country, the many tax rates and the whims of the council to decide which product will be taxed at a particular tax rate has made the mechanism close to being one of a “draw of lots”. Add to this, the various cesses levied (which ensures that there is no revenue sharing here) have also made a mockery of the system. Through the GST, theoretically, the states had given up their individual right to levy taxes. However, the exigencies of the political and economic environment have allowed for exceptions. For e.g.: Kerala has been allowed to levy a cess on account of the floods that rocked the state. Now that the precedent has been set, what happens to others ? Will UP be allowed a cow cess? Similarly, the electoral compulsions of states going in to elections have taken center stage. What else could explain the rate cut on khakras before the Gujarat assembly elections or the change in criteria for the composition scheme few months before the General elections? The Central Government with disproportionate voting rights of 33%is definitely in a position of a conflict of interest of sorts and can use it to further political interests. Renowned tax lawyer Arvind Datar in this speech prophesied this eventuality! (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=2ahUKEwispLCxqIHgAhVHL48KHelYBv0QwqsBMAF6BAgBEAQ&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DxGmJyxugA2E&usg=AOvVaw1fw9-Q3h1rvfITHxiaiovB)
- Eliminating tax evasion through compliance measures: The GST was touted to be the panacea to cure the tax evasion malaise. The voucher matching system was meant to ensure high levels of compliance. The unintended consequence of this was that businesses began to avoid risk taking altogether. The central premise of any business is its willingness and ability to take calculated risks. With these levels of pressure in matching invoices to inventory, businesses avoided taking risk altogether leading to fall in overall economic activity. Multiple return forms at regular intervals also necessitated seeking help from professional accountants, thus increasing costs for a business. As this piece outlines, the GST has made an enduring alteration to the nature of small and medium businesses effectively dealing them a deadly blow.(https://www.livemint.com/Opinion/vlRdwQz1LHiQDna3ce1DPJ/GST-features-contributing-to-GDP-growth-slowdown.html .
As a consequence of the above, while the number of people registered on the GSTN has increased the number of people filing returns has been steadily falling. The GST collections have been far from the expected numbers. In the first seven months of the financial year, the central GST collections have been Rs 2.62 lakh crore. This is no where close to the target of Rs 6.04 lakh crore. The very purpose of the GST for the government which was to ensure that more people file taxes and pay taxes in-time has been defeated.
This change in structure is however not the first attempted in India. The move to the MODVAT/CENVAT from the late 1980s through the first decade of 2000 sought to attempt to solve the same problems as GST does. Comparing editorials from various publications, from then and now, leaves us with a deja-vu feeling.(Read https://www.indiatoday.in/magazine/economy/story/19860531-companies-struggle-to-come-to-terms-with-modified-value-added-tax-800893-1986-05-31 and https://www.livemint.com/Politics/CM1PdXM2ck30nPKT7b1twK/Tax-regime-reform-has-a-long-way-to-go.html)
In its current form, it is at best a work-in-progress and at worst a botched opportunity.
So what can be done? Hans Rosling in his book Factfulness said “ look for causes not villains, look for systems not heroes” Taking a leaf out of this, we need to dissect the causes for the failures and redesign the system with the twin objectives of making sure the system achieves the sweet spot of compliance and being business friendly. The cost of compliance cannot come at the cost of business. An optimal trade off point needs to be arrived at. Design thinking in policy, anyone?
As a first, the voucher matching system needs to go. While the government has made some progress in simplifying the returns process, a lot remains to be done.
Secondly, we should move to a two tier tax rate system so that scope for lobbying reduces and there is clarity on what good is taxed at what rate. The tax rate on a product cannot waver with the direction of the wind in the political landscape.
When we simplify the system enough, economic activity will pick up and as a result tax collections (both direct and indirect) will increase.
Lastly, the structure of the GST council and the powers entrusted to the stakeholders should be re looked at. The fiscal policy is the domain of the elected government of the day. However, we need to have a checks and balance system which guards against populism and profligacy of the extreme kind. Should we look at an independent regulatory institution like the RBI to ensure a robust indirect tax system that brings about predictability to businesses ?
In an election year, we can be assured there will be some debate on this. Here’s hoping for a genuinely good and simple tax !