ssentially, the Indian tax regime is a fairly multifaceted game between the Union government and the state governments. The allegation of double-taxation comes from this. Furthermore, when the Constitution was framed, they made it so that the Union government could levy service tax which they thought would earn more while the states were allowed a monopoly on the sales tax. As the GST reached its final stages, the historic legislation promises to unify the tax system for the nation and increase the GDP by 2 per cent. GST increased the woes of the common man by 80 per cent, concerns by 70 per cent, pain by 50 per cent, and strain on pocket by 50 per cent. But the optimists see the GST as a silver bullet that can cure all of India’s economic problems, from poverty to growth, inflation to doing business. Pessimists say too many objectives are being loaded on the GST, and there will be no accountability in the system. The truth lies somewhere in the middle. How should we think about evaluating the rollout of GST? There are five windows through which we can view this process and come to dependable conclusions — consumption, production, inflationary pressures, compliances, and tax buoyancy.
The life of an average Indian has become harder, pushed prices up and failed them and their hopes miserably. The performance of the GST Council needs to be evaluated on these five parameters. There is a danger of the Council getting lost in the maze of accountability. What if inflation rate remains low but not due to tax efficiency but because of a cut in consumption? Or, consumption remains constant but profits of corporations fall and impact tax revenues through reduced direct taxes? Or the weight of compliance forces the entrepreneurs towards evasion, non-reporting, or plain bribery of the dreaded License Raj of the past? These are the questions that the Council needs to think about. Like demonetsation, whose evidence of success or failure must go beyond the anecdotal, the real impact of the GST (Goods and Services Tax) will not be judged by the policy archer’s target practice but by actual data and empirical observations. These will be visible in about six to eight quarters to quantify. But even before the GST rollout, we have one success metric — politics. In the field of federalism, the Srinagar Consensus saw the combined efforts by the Centre and the States through the institution of the GST Council usher in a transformative tax system, and take a gamble on the economic growth. This is a landmark in India’s democratic policymaking. While we wait to strengthen and consolidate its successes and take course correction and modifications on its failures, we need to be clear about how we go about evaluating this approach to taxation. India needs to move away from the doom and gloom scenarios and predictions.
A tax impact the aggregate consumption in the economy and nudges its constituents — households, firms, governments — as well as the rest of the world through exports, towards making economic choices. Ceteris paribus, a higher rate of GST on one commodity would shift consumer preference towards alternatives with a lower taxes or lead to its non-consumption on the margins. Not all decisions are rational, as neoclassical economists would have us believe, but in the summative, the logic of lower prices leading to greater depletion and vice versa stand. We have seen this work through monetary policy in the past when increased interest rates led to a fall in consumption and through it the inflation rate. On the fiscal side, the GST will achieve the same result by making the prices of goods and services cheaper or steeper and through them impact consumption. If the rates are optimal, aggregate consumption will not change; if low, it could lead to a rise in the consumption; if high, a fall.
The price tolerance in India is very low. That’s why inflation is more a political issue than an economic one. While Union Finance Minister Arun Jaitley, as well as the State Finance Ministers, have repeatedly emphasised that the GST will not be inflationary, we need to wait for data for its confirmation. The first two quarters have gone in stabilising the new tax regime. The GST is a high-compliance tax system. It is an exceptionally high-digital system as well, from infrastructure and processes to filing and receiving credits. The strain on existing entrepreneurs has increased and those planning to expand capacities or open new outlets may not do so until the system stabilises. New entrepreneurs held their investments until the field is clear and visible. Why invest when there is implementation uncertainty? Of course, any new system will have these problems. The difference is the zeal with which the GST Council has outsourced rules and provisions to bureaucrats and put the weight of ensuring downstream compliance on entrepreneurs, effectively creating a Big Brother society. There will be good business for chartered accountants and lawyers in the short to medium term, possibly longer. But as a nation, we will take several steps back if compliance burden gets the better of our enterprises. The first few quarters of implementation has forced the Council to change rules and fine-tune them such that ease of doing business rises rather than falls. Services got more expensive with implemented GST as states have the services under their net and hence it will mean they can fix higher rates. Phone bills got expensive, food, spa, and luxury services became expensive. Thanks to the pressure from Maharashtra, TN, and Gujarat – which are industrialised states – an intra-state levy of 1 per cent will accrue in addition to the GST. Modi and Jayalalithaa had both opposed the Congress version of the bill previously because they do not want to lose revenue, being export-led states. Now, you don’t have to worry about multiple taxes in multiple places. Earlier you used to see entertainment tax on your movie tickets, service tax on mobile bills or hotel bills, VAT on your purchases and sometimes excise duty as well. All of that have been covered in GST. All your expense bills have a single tax, called ‘GST’. In addition to GST, you will also need to pay ‘income tax’ since that is not going anywhere. And oh, the ‘service charge’ (note: service charge, not service tax) will still haunt you in all the restaurant bills. On the face of it, GST proved to be a mixed bag with some of the necessities becoming cheaper, while the others might get more expensive. While in the long run the GST might have a favourable effect on most of the sectors of the economy, in the short run, as with the most of the reforms, the benefits seem to be limited. Based on the experience of GST implementation in other countries, India could observe an inflationary impact at the onset of the reform, which might fade away once the legislation sinks in.
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