As GST Launch Looms, Modi Must Avoid Hype and Focus on Implementation

The government would do well to avoid hyping GST as India's new midnight "tryst with destiny" and instead focus on its design and implementation, without which the biggest tax reform could turn into the biggest nightmare for the country's economy.

India’s small traders and business community is still struggling to catch up to GST. Credit: PTI

The hype-prone Narendra Modi government would have us believe that Goods and Services Tax (GST) is akin to the midnight “tryst with destiny” India experienced several decades ago. A sort of new economic freedom, if you will. And given Modi’s penchant for event and headline management, the tryst with destiny must be celebrated with a midnight parliament session. The opposition is wondering how to respond to this. What will a midnight session achieve except to provide the prime minister another self- promoting PR platform at a time when millions of small businesses and traders are having sleepless nights over how the design and manner of implementation of GST will affect their lives and livelihood.

Many small traders say they were just recovering from demonetisation and a messy GST is being thrown at them. I suspect the insistence on July 1 as a cast-in-stone launch date despite the utter lack of preparedness was partly because Modi wanted Donald Trump’s public endorsement of the tax reform.  After all, that is part of the prime minister’s personal brand building exercise.

Modi successfully sold GST in the US but he is yet to convince millions of nervous small businessmen and traders as to what impact it will have on them. In fact in a close door interaction, some CEOs of global services companies in Washington told Modi they were not sure how the complex, multiple slab tax reform will impact e-commerce companies such as Amazon. Modi assured them things will work out fine. One doesn’t know whether it was mere coincidence that immediately thereafter, while the PM was still in Washington, the finance ministry announced some relief on GST for e-commerce majors, which will help Amazon immensely. Of course, it will also help domestic companies like Flipkart. But it is to be noted that the pressure came from the US during the Modi’s visit.

Well, Amazon and other global services majors have their way of getting things done. And they will heartily partake of the “tryst with destiny” or the new economic freedom that Parliament will celebrate at midnight before the launch of GST on July 1. Meanwhile, no one has any time to assess the impact the complicated design of GST will have on the small trading and business community on whom lawyers and CAs have already descended like birds of prey.

In the run up to the launch of GST, finance ministry officials have shown an astonishing lack of sensitivity to small traders and businesses. In one statement, Modi’s man for all seasons, revenue secretary Hasmukh Adhia, made a stupendous claim that the government was totally ready for the launch but the businesses were not!

A few days later, the chairman of GSTN network, the IT backbone that is to process tax returns and invoices of one crore business entities, said the systems were not tested fully before the launch. And mind you, he says this barely five days before the official launch. It is against this backdrop that government wants to hold a midnight session to celebrate the dawn of a new era in India’s economy.

Is GST such a seminal reform? For starters, one must jog the reader’s memory in the age of amnesia caused by the multimedia assault on our senses. Well known economic commentator T.N. Ninan has pointed out that the basic principle of value added tax has been adopted incrementally over the past two decades in various forms such as state value added tax, central value added tax, modified value added tax with tax on inputs being refunded. So one must give due credit to past finance ministers like Yashwant Sinha, P Chidambaram , Jaswant Singh and many committed bureaucrats and economists who kept refining the principle of value added tax incrementally.

The idea of GST  builds on much of these past indirect tax reforms at the central and state levels and links them up in one comprehensive tax which required a constitutional amendment. It is an idea whose time had come given the progress made in the past and given the positive experience of states with the VAT experiment 13 years ago.

BJP stalling in the past

It is also known that the UPA tried its best to bring the GST law in the 2013 winter session of parliament. By then Modi had become BJP’s prime ministerial candidate for the 2014 general elections and was exercising a decisive influence on BJP’s strategy in parliament. Even though leaders like Sushma Swaraj and Arun Jaitley were open to passing the GST law in end 2013, Modi decided otherwise. Later Manmohan Singh went public with the fact that a BJP MP came to him with an offer that the opposition (read Modi) would cooperate if the investigative agencies diluted criminal charges against Amit Shah.

Such a sordid backdrop to GST’s journey should be reason enough to not convert it into a midnight parliament celebration. Instead, the government will do well to focus on the details of the design and implementation without which the biggest tax reform could turn into the biggest nightmare for the economy.

GST design crucial

And this warning has come from none other than India’s chief economic adviser, Arvind Subramanian, who wrote in the Indian Express on April 4 2017, “this is a constitutional moment for the GST, a moment ripe for ambition and visionary decision making which must be seized … In the future intertia and dead habits will reassert themselves, strongly perpetuating the status quo. In that light, the guiding principle cannot be to avoid a departure from status quo. If that were the case — and if hence the GST rates were set close to today’s rates — the question might legitimately be asked, why bother with GST at all?”

Subramaniam had asked why bother with the GST at all if the final version of the tax rates reflected the status quo. He had then hoped the 28% tax slab would be done away with or merged with the 18% tax rate to make it 20%, which would be the peak rate. Initially, Jaitley supported the idea of 20% as peak rate because no country has a GST rate above this. East Asian economies average around 10 to 12% and European economies are about 19%.  

In the end the status quo prevailed , partly to please the states, as an unusually large number of consumer items were brought under the 28% slab which Subramanian, and presumably Jaitely, had clearly spoken against. Therefore, Subramanian’s question “Why have GST at all”?, continues to have significance.

This, of course, is over and above the fact that the energy sector which is a key input to all that is produced in the economy is out of the scope of GST. The total tax incidence on diesel which is consumed even by the farmer is over 45% , which, under GST definition, is a sin good akin to tobacco or luxury cars. Real estate transactions, admittedly the biggest black money generator, is outside GST even as Modi waxes eloquent about attacking black money.

So is such a GST worth celebrating in a midnight Parliament session? The opposition parties must tell the government that the principle of GST taxation has already been supported by all the parties in Parliament. Now it is the job of the government to operationalise a well designed GST without much pain to India’s six crore small businesses & traders. Prematurely celebrating India’s new “tryst with destiny” is uncalled for.

Let the people decide what their experience with GST is. If they indeed feel a new sense of freedom it will reflect in the 2019 general elections.