India is infamous for its Byzantine system of multiple taxes on consumption: value-added tax (VAT), Octroi, cess, excise duties, a hefty customs duty, and sales tax. In 2017, the Modi administration undertook the task to take to consummation a long-standing endeavor to subsume different taxes into a transparent, unevadable, convenient, nationwide, single tax.
And so they did! On July 1, 2017, Indian Prime Minister, Narendra Modi, rolled out the goods and services tax (GST) to replace all existing taxes at the central (federal), state, and local level. The new tax reform, a surrender of taxation powers by the states to the center, promised to mop up leakages in the tax collection under the old system and boost government revenues through collecting taxes at the consumer end, thus, casting a wider net to cover the massive informal economy of India.
The deal was bittersweet, as it led to the states losing autonomy to design their own tax systems, while on the other hand receiving assurances of a steady allocation in the tax revenues collected at the center.
The reception of GST was a mixed bag, with the opposing coalition in the legislature boycotting the rollout ceremony, political pundits and media gurus casting doubts on its success, rumor-mongering on social media, and a state of panic and doom in the minds of the citizenry.
Predictably, Prime Minister Modi, in his usual smug demeanor and insufferably professorial manner of speaking, at the launch event talked up the GST, drawing equivalencies between the tax reform and historic events like the Declaration of Independence and installation of the Constitution. A religious reference was thrown in for good measure.
GST isn’t a panacea for India’s economic ailments. Quite the contrary, it will raise difficulties that could undercut free market principles, choke small-scale enterprises, stifle entrepreneurship, and throw cold water on industrialization in India.
GST subtly affects the feedback mechanism in the political governance of a federal republic like India. As the new tax elbows out scores of made-to-order and customizable tax systems of different states and union territories, it concentrates much of the economic decision-making in the hands of the central government, thus, widening the messaging gap between the citizens and the representatives.
It will be near impossible for the states to influence demand and consumption of goods and services through changing the tax rate. Also, a steady flow of tax revenues from the center to the states will make the latter less cognizant of people’s feedback on public goods, resulting in poor services.
It seems like India’s bureaucratic boffins threw the merits of diversity to the wind, a tenet that is peddled out every once in a while to hold together the fractious society. Diversity in taxation across state lines creates a competitive economic environment in which state heads have to work to attract businesses. For businesses, especially startups, there is a wide range of options to pick from.
States, as a result, function as laboratories where different economic policies play out and the ones that produce a business friendly environment and steady growth are duplicated elsewhere.
A single, centralized tax system undercuts the economic diversity and disables competition and free markets, something that developing nations ought to get hold of, if they are earnest about progress and growth.
Under GST, the definition of small and medium enterprises (SMEs), based on turnover, has been narrowed, thus, expelling many SMEs from the tax benefit cover. SMEs form the dominant share of most OECD economies around the world, where they are responsible for job creation, innovation, and becoming indispensable links in the supply chains of larger firms.
This cannot be any truer for an economy like India, where the informal sector makes for a substantial share of the GDP and employs a large number of semi-skilled and unskilled workers.
Despite being hailed as a transparent and streamlined tax system, the implementation of GST means that employers will have to go through a steep learning curve, trying to learn the ropes of the new system. Not only does this present an opportunity cost (a one-off), it is touted that legal compliance will cost business owners a substantial sum of money, raising overhead costs. While this tradeoff is favorable for big businesses, it is a cause for concern for SMEs.
While Narendra Modi, the darling of the educated youth of India, promised oodles of progress, prosperity, and ‘happy days’; the tax schedule of GST seems to be telling a slightly different, and perhaps, an insidious story.
According to Piruz Khambatta, Chairman at the Indian Industries’ National Committee of Food Processing, per the GST tax schedule, the tax rate on processed (canned and bottled) produce is higher than that on un-branded, loosely-sold fresh produce.
This can have a dis-incentivizing effect on mass-produced, processed food, in turn discouraging industrialization, innovation, and establishment of food hygiene standards. Also, mass produced goods tend to be uniform, cheap, and abundant. An over reliance on goods produced through a non-industrialized informal sector, despite resulting in job creation, could over time, hold back industrialization and technological advancement.
Another example of such glaring incoherency is illustrated by a comparison of tax rates on items listed under serial numbers 24 and 25 of the schedule. In an incredible move, machinery used in agriculture, horticulture, forestry, apiculture, and poultry farming is taxed at 5% and 12%, while miscellaneous items used in Hindu religious ceremonies are tax-free. It’s almost as if religious pandering has taken precedence over mechanization of key sectors of economy.
Without belaboring the above point, it merits noting that low-demand, artisanal, non-mechanized industries like ‘khadi’* are also given a tax break, while mass produced cotton goods are taxed at 5%.
This pandering to religious and anti-colonial, nationalistic sentiments, a classic example of third-world politics, flies in the face of the ‘progress, prosperity, and happy days’ narrative from Modi’s campaign trail.
In essence, unwittingly or otherwise, GST seems to be a potential quagmire, delivering questionable amounts of economically-sound nuggets, but served with generous portions of feel-good, religious nationalism.
‘Good days will surely come.’ Hunker down for turbulence and retrogression.
* a variety of home-made Indian yarn, which during colonial times, symbolized dissidence towards British effort to dump cheap, mass-produced English yarn/thread in Indian markets, while dismantling the domestic yarn industry.