The GST Conundrum

I see a lot of doomsayers, coming down on GST, and it's implementation, effective first July. Knives are already being sharpened, metaphorically speaking, to be driven into the Govt., by the Opposition, Media and "Economic pundits", and wannabe's alike. Mr. Arun Jaitley's team is not helping matters, by taking a hard stand on the implementation. Confusion, and even panic, reigns supreme.

I have been on the ground, in at least two countries, when their respective GST's were implemented, replacing the then existing VAT structure. Australia in the late nineties and early 2000s, and in Singapore. These are relatively more "established" economies, with clear tax structure, and much greater tax compliance than in India today. But even these found it more than a handful, to manage the onerous task of cut-over to the GST regime. Even there, there were naysayers, denouncing the moves to transition into GST. My ears are still ringing with the Aussie shrills of " this will destroy the economy', in the Capital Hill of Canberra. But transition, they did. And successfully, too. With just two categories of GST . Everything has either one uniform GST rate ( 10% and 7%, respectively for the two countries), or none ( applicable only to the "essential goods and services"). Remember, Australia is politically a loose federal structure of states, owing allegiance to the Queen, and yet, some of them itching to secede from the union, time and again. I recollect the GST was one of the hot topics for the failed secession attempt of Western Australia from the Union, a few years ago. Singapore managed it very well, politically, and the transition was smooth. They initially were happy with 5% and then moved on to 7%.

Other countries have still not moved into a GST regime. China, for example, has a peak VAT rate of 17% plus local taxes. There is no official plan to move to GST there. One may then wonder " if China can do without GST, then why impose on us? You, evil Modi!". Firstly, this is not a political debate about GST. It is an economic one. In fact, if at all, this could impact Modi electorally, if the implementation goes awry. After all, his major constituency of voters in 2014 had been traders, who are , generally speaking, so used to pocketing tax meant for the exchequer, by various dubious means. GST is expected to put an end to their " incremental income" , by forcing compliance, and making sure that the money that is meant to go to the govt , does so. Yes, there could be the proverbial slip between the cup and the lip, for some time, but I do expect that to be ironed out over time. Modi has bitten the bullet, and a hard decision has been taken to implement. Even fi electorally damaging for his party, this GST will be prove better for the country over the long term. Perhaps, Modi's hunch is, that going by the example of DeMon, where it was widely expected to trounce the BJP in U.P., but instead, give him a handsome mandate, he may fancy taking electoral chances too, in 2019.

Secondly, why GST? All countries that have implemented GST have witnessed increased compliance, at stable prices, over time. GST will be , broadly speaking, more like the musical chair game, where the onus is on the last person in the chain, to collect evidence of compliance earlier, and claim relief, failing which he will lose out. Hence it is in his interest to comply. Failing which , the end consumer will end up paying through his nose. Thirdly, the state governments hitherto had been playing with tax rates in every tax budget, to shore up their regimes of freebies ( remember those farm loan waivers, free TVs, free fridges, free bicycles, free laptops, sewing machines and what not?) . No, the state Govts lose the ability to fiddle around with tax rates, generally speaking. The will now be the sole preserve of the central govt. Hence, expect the State Government finances to come under strain, if they do not tighten their belts. This is good for the country as a whole, in the long run, but in the short term, frictions are inevitable.

Fourthly, in a vast federal structure like ours, implementing a monstrous tax structure is going to be a daunting task. For the manufacturers, traders, service providers, govts, tax authorities and Chartered Accountants alike. Make no mistake about it.

Lastly, in a country where awareness about taxes is generally abysmal, expect a lot of cheating, and blaming the govt for it, to happen. This will provide the ideal fodder for the political parties to go after the government. In some cases, prices are expected to spike, in the name of GST. After all, the average ignoramus citizen is unlikely to either fathom GST or question it. The RBI has done well not to reduce interest rates, in spite of the lowest possible inflation agains ta backdrop of three successive failed monsoons. There was heavy political pressure to do so, in order to stimulate growth, but so far, the RBI has held it's ground, perhaps in anticipation of a general price rise due to GST. The bottomline - in the normal course, GST should only reduce prices overall ( may vary amongst individual goods and services) , but then, the shoddy implementation is most likely to aid the those cheaters amongst the principals, and could witness a general price price. To me, this appears to be the most likely scenario. I will be delighted to be proven wrong. Nett of it, is GST for the better or for the worse? My take - worse, for the short term. But will simplify and regulate taxes and their compliance over the long term, and will stimulate growth, and free movement of goods and services across the country.