A lot needs to be fixed if GST is to benefit all

It’s often been estimated that what is known as India’s black economy is around 70-80 per cent of the official economy. This means around Rs 90-100 lakh crores escapes the tax net. If this is captured, India’s tax-GDP ratio will simply double, and the government will have twice the money to spend on development. At least in theory! There are two big cash streams to the growing black economy pool. One is income-tax evasion, the other is evasion of other taxes like excise and customs duties and sales tax. There is a third perennial stream: crime. This is true even in more tax-compliant societies like the US and Britain — but there tax evasion is a bigger crime than racketeering. Don’t forget: Al Capone was locked up for tax evasion. All taxation reforms are meant to ensure better compliance. Full compliance is an ideal. Recently, the government has logically ordered the interlinking of Aadhaar and PAN to make income-tax evasion even more difficult. We must wait and see if our native genius finds ways to circumvent these measures.

The just-launched Goods and Services Tax is meant to squeeze more out of our recalcitrant corporates and businessmen. Prime Minister Narendra Modi had rightly noted before its launch: “The rollout of GST on July 1 will, in a single stroke, convert India into a unified, continent-sized market of 1.3 billion people.” He called it the most significant reform after the 1991 scrapping of the Industrial Licensing Act of 1951. But it is hardly so. The essence of any true reform is to unfetter the process, whether in setting up or running an enterprise or getting a passport. This the GST, as it is now, doesn’t. Nevertheless, it is a bold move that has been in the making for 17 long years. It overcame many obstructions (most notably by then Gujarat CM Narendra Modi) but also got transformed from a simple two-tier tax structure into a somewhat unwieldy policy with half a dozen slabs. Instead of reducing recordkeeping and paperwork (even if through computers and Internet), it increased it. It does hold the promise of vastly reducing leakages from what has become an extremely corrupt and clumsy system.

Essentially, the world’s third largest economy (by PPP) will transform itself by removing internal tariff barriers and collapsing 17 Central, state and local body taxes into GST. This should hopefully hugely add to government revenues and give it the 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 one to two percentage points to India’s annual growth rate, are high. Revenue losses may be all but over. But there’s one kind of revenue loss we should worry about. Tax evasion is India’s biggest business. The earlier web of excise, customs and sales taxes created a system in which huge revenues were lost to the State, while huge revenues were collected by Central and state tax officials. They will do everything in their power to make the simplified system even more complicated. Unfortunately, the unambiguity needed in the language of regulations 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, mostly located in Jalandhar and Meerut, directly employs around half a million people. India’s sports goods market is valued at $3.6 billion, and is growing at 35-40 per cent annually. This is likely to rise with increasing awareness about health and fitness in the country. India also exported sports goods of around $400 million, compared to $214.95 million in 2012-13. The major items exported in 2013-14 include inflatable balls, cricket bats, general exercise gear, sports nets and protective equipment for cricket. Now consider this. All sports bodies and their members, like players and coaches, can directly import sports goods without attracting any customs duty. But Indian-made sports goods will entail payment of 18 per cent GST. This will effectively remove any competitive advantage they may have. Take India-made table tennis tables. The GST Council’s notification after 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 import duty or IGST. But if they buy them from local manufacturers it will entail 28 per cent GST.

Similarly, imported sporting goods like cricket gear, hockey sticks and soccer balls will become cheaper than India-made products. “Make in India” will soon become make in China, Pakistan or wherever, but not here. Is this what Arun Jaitley wants? Sachin Tendulkar’s son will be able to import his cricket kit from England, while a middle-class kid from Saharanpur or Ranchi will pay more for Indian kit. Is this the new equity? It’s bad enough that luxury cars will attract lower GST and be cheaper, while the converse is true for mid-range and small cars. Worse, environmentally-friendly hybrid cars will cost even more. This is clearly indicative of the lack of preparation. It’s true there is some reduction in small and mid-sized car models. But I suspect this is more to do with getting rid of a large backup of unsold stock. In June this year, car sales decreased by eight per cent. It seems some companies like Maruti Suzuki (with 50 per cent marketshare) are making a virtue of necessity.

Taxpayers are already complaining about the sheer volume of extra record-keeping and number of forms to fill. If these were essential, arrangements should have been made to train people and prepare. Such a gigantic reform requires huge preparation before rollout. The Modi government is again trying to do what it did with demonetisation — where it turned a straightforward money exchange scheme into a huge economic hole. We again see patently inadequate policy implementation, with not all stakeholders brought aboard on the new measures, and there will be a surfeit of confusion that will slow down economic recovery. The Modi government once again seems more intent on political gains for itself than economic gains for the country.