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Why one nation, one tax is problematic for India
June, 09th 2017

Two incidents brought home to me that it is still a long haul ahead before the country has an efficiently operating Goods and Services Tax (GST).

The first was the active encouragement by a salesperson in a boutique furniture store to finalise our purchase of a pair of beautiful reclining chairs, which we could not afford, before the onset of the GST. She was trying to save us from impending confusion as the applicable GST rate on luxury furniture was not clear to her.

Second, the housing finance company on whose board I serve, informed us that under Section 22, companies supplying goods or services of value above Rs 20 lakh are required to be registered both with the Union government and UTs or state governments in which they operate. Thus, service sector companies now face the daunting prospect of having to deal with not just one by 30 tax administrations, each with its own norms and distinct attitude towards rent seeking.

I wonder if this "chaotic consensus" (term borrowed from Satya Poddar) will result in greater corruption once it is rolled out on July 1. Let’s seriously hope, it will not.

With the prime minister having reportedly spent more than two hours on reviewing the state of preparedness, one assumes that possibilities of technical glitches and classification of goods across the four applicable rates will be minimal. Some confusion is bound to remain and will be resolved as we go along.

Yet, despite the strong appeal of its simplicity, a single uniform rate of GST, resulting in "one nation, one tax", could not be appropriate for India with its continental scale, regional and economic diversity, and fiscal federalism.

Historical reforms like the GST must necessarily evolve over time, having provided the space to the states to assert their rights. Hopefully, the GST Council will remain an active and responsive body to facilitate and direct this evolution.

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There are two critical issues that could still derail the introduction of GST. The first is the vexed problem of sectors where the entire chain of production has hitherto been done without any tax payments and necessarily in cash. There are streets after streets in cities across India, where business thrives without any trace of documentation or credit payments.

A visit to Dharavi in Mumbai or Shahdara in Delhi would quickly provide more than necessary evidence. How will these businesses, whose countrywide scale could be gigantic, be brought under the GST regime? Will businesses find some way to beat the system, or alternately will they shut down their non-tax paying units for fear that a transition to the GST regime may implicate them for past tax evasion?

Should the government not announce a kind of "grandfathering" of all past tax liabilities to encourage such businesses to make the transition without fearing for their past sins?

Penalty

Second, anyone who has had even a cursory brush with the intrepid doyens of the Indian trading community would know that these stalwarts pay tax most reluctantly. They have perfected their practices over centuries to successfully escape revenue demands of rapacious emperors and of the British colonial administration.

The resourcefulness of India’s trading and intermediary class was fully on display in the phase after demonetisation. They managed to squirrel all their undeclared incomes into bank accounts, effectively spurning the government’s offer of getting a reprieve after paying a penalty.

Whether or not they are able to beat the system yet again will become clear once we know the result of the tax department’s success or lack of it in seizing illegal incomes deposited in nearly 18 lakh dubious bank accounts with average deposit of a whopping Rs 3.3 crore.

My fear is that this large Indian trading community will play truant with GST and not submit to its stiff requirements easily. They are already publicly lampooning the measure as too complex, unnecessary and costly to implement. They will surely play the victim card and this refrain will become stronger over time.

Their opposition is most audible in Kolkata which, having lost its manufacturing base, has emerged principally as a trading hub for eastern and northeastern states and Bangladesh. Could this be the underlying reason for West Bengal dragging its feet on on GST?

Opposition

I hope the finance ministry has taken cognisance of this likely opposition. While it is a good start, it will take more than the creation of cells within relevant ministries to tackle this opposition that has the potential to throw a spanner in GST implementation. The BJP and its allied formations like the Swadeshi Jagaran Manch must rise to the occasion and create the societal support for the measure.

Finally, the talk of establishing a Price Monitoring Mechanism (PMM) as envisioned under the GST Act fills me with great trepidation. Having worked, though many decades ago, in the Bureau of Costs and Prices, I have firsthand experience of the high-handedness of such authorities.

They can cause untold harassment to even honest businessmen and have the potential to become hate objects very quickly with their arbitrary behaviour and rentseeking propensities.

The PMM is best held in abeyance until it is seen as unavoidable for stamping out rampant mal-practices by industry and business in the post-GST phase.

By holding it in reserve, Arun Jaitley will convey two important signals. One, that the government trusts Indian business to honestly implement GST. This could in itself be a much-needed new beginning. Two, the threat of strong action against maladroit elements will continue to exist and perhaps act as sufficient deterrence.

It is worthwhile giving competitive market forces a fair chance rather than pre-empting it by administrative action.

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