The rollout of the GST also had a political fallout for the ruling party at the Centre. The BJP leaders were not tired of pointing out how the new indirect tax regime was a sign of their deep commitment to cooperative federalism. Modi had indeed talked about cooperative federalism before the launch of the GST at various forums, and the GST was now being touted as the proof of that commitment. The idea of setting up NITI Aayog was to encourage the states’ participation in policymaking. After the Centre failed to amend the land acquisition law, it had wanted the states to introduce similar laws to make available land for industrial projects. But not too many states came forward to amend their laws. Similarly, labour law rigidities were sought to be relaxed by encouraging states to amend the respective laws. But again only a few states changed their labour laws to make them more flexible. Even the progress on encouraging states to reform their respective laws on agriculture produce marketing was quite tardy.
Under these circumstances, the GST was being presented as the first big reform where the Centre had struck a new relationship with the states, even though it faced many major procedural hurdles and glitches. The GST Council was an example of a forum where decisions were taken after taking on board all states, irrespective of their governments’ political affiliation. Jaitley’s decision to compensate for the entire loss of revenues that the states might incur for the first five years was a turning point in the negotiations for rolling out the GST. But it also showed that the Centre was willing to be sympathetic towards the states’ fiscal concerns. The functioning of the GST Council was also an indication of how the new tax had brought a new equation between the Centre and the states, which only strengthened the federal foundations of the republic. The fact that all decisions at the Council during the first two years after the GST’s rollout were taken by consensus was another proof of that positive change in the environment on Centre–state economic relations at least as far as the GST was concerned.
An impact of the GST that most analysts did not anticipate is with regard to direct tax collections. The launch of the GST has certainly improved the coverage of the business establishments under the tax net. This may result in an increase in GST revenue over the years. But an associated gain as a result of GST registrations and the new system of electronic tracking of all transactions is that promoters and business establishments, particularly those in the micro and small enterprises sector, are now coming under the income or corporation tax net. The GST has certainly helped in reducing the incidence of unaccounted transactions, but this has also led to improved direct tax compliance.
The new indirect tax regime has also surprised many public finance analysts in terms of the impact GST was to have on manufacturing and consuming states. It was earlier believed that GST would favour states that consume more than those that have a large concentration of manufacturing enterprises. This is because GST is a destination-based tax, where the final tax is paid and collected at the point of consumption. This had naturally ignited fears of revenue loss among the major manufacturing states. It is also the reason that manufacturing states like Gujarat and Maharashtra had lobbied hard for the levy of a 1 per cent interstate supply tax on GST rate as they feared revenue loss. Fortunately, the country was spared the trauma of such distortions in the GST regime. And now the data shows that the manufacturing states are not doing that badly as regards revenue collections under GST. The tax numbers for Maharashtra and Gujarat, which are largely producing states, show that their tax revenue growth actually went up from 9 per cent and 3 per cent respectively in 2016–17 to 19 per cent and 12 per cent in 2017–18. Haryana also showed a doubling of its revenue growth to 20 per cent and Punjab recorded a trebling of its revenue growth to 13 per cent in this period. In contrast, states like Bihar, Madhya Pradesh, West Bengal and Andhra Pradesh have seen their tax revenue growth declining in this period, in spite of them being known to be consuming states. However, Kerala and Uttar Pradesh are largely consuming states, but they recorded healthy growth in revenues.
Clearly, India’s GST experience has questioned the textbook assumptions that it favours the consuming states more than the producing or manufacturing states. The fact that Gujarat and Maharashtra have a strong base of services consumption must be an important factor that should be borne in mind. An increasing segment of GST revenues is now coming from the services and since the manufacturing states are also major consumers of services, their loss on account of revenue from goods appears to have been more than made good by the rapidly growing services sector. There is yet another reason behind the skewed growth pattern. Revenue growth is also a function of the efficiency of tax administration and this is more so with the GST. Thus states that are laggard in collecting taxes and plugging revenue leakages will tend to do worse than those which have beefed up their tax administration apparatus.
Tax experts, however, do not wish to jump to any conclusions on how revenue growth has taken place in the first couple of years after the launch of the GST. They concede that revenues in the producing states have not suffered, but point out that this could be due to the release of the blocked input tax credit refunds for exports and also for domestic industries.
Looking ahead, GST’s roadmap seems to have been redefined to address many of the criticisms the original duty structure had attracted for it being imperfect with too many rates and too many exemptions and the procedures being too cumbersome for honest taxpayers to comply with the system without an adverse impact on their ease of doing business. The top rate of 28 per cent is being pruned and will probably remain only for a score of sin or luxury goods like tobacco and luxury vehicles. The need for a compensation cess to continue beyond the stipulated five years may no longer exist. Indeed, this could be phased out even before the end of the five years. It is a cushion that was needed when the GST was launched but now that the states’ compensation needs are coming down, the question now is whether the compensation cess should be scrapped. Tax experts are of the view that scrapping the compensation cess is a decision that should be taken only after detailed studies. Most of the tobacco duties were converted into the compensation cess. What will happen to the tax on tobacco if the compensation cess were to be scrapped? There will be similar such questions on the continuation or discontinuation of the compensation cess.
Refunds of claims to GST taxpayers continue to be a problem and the GST Council and the GST Network have their task in this area cut out. India will be among the many countries where prices did not go up hugely after the rollout of the GST. Fearing mainly the inflation that would arise because of this move, the government set up an anti-profiteering authority to ensure that industry and trade did not pocket the entire gains of lower tax incidence on account of the GST and instead passed them on to consumers.
So far, the inflation rate has remained benign, and the anti-profiteering authority has largely existed only on paper. It has a life of two years from its constitution in 2017. The sooner it is wound up the better it is for the sanctity and cleanliness of the GST regime. The bigger challenges for the GST regime lie in the areas of extending it to include petrol, diesel, crude oil, natural gas and aviation turbine fuel. These products have huge revenue implications for the Centre as well as the states. Theoretically, supplementary excise or sales tax can still be levied under the GST on products such as petrol, diesel, crude oil, natural gas and aviation turbine fuel. Thus, the argument that such products cannot be brought under the GST because of revenue implications is fallacious, according to tax experts. Nevertheless, bringing these products under the GST regime, even as excise and sales tax continue to be levied on them, would be a challenge for the tax administration in the future.
The government should also strive hard to avoid the pitfalls of excluding more sectors from the input-tax credit chain. The heart of the GST lies in building a value chain of economic activities, where each producer of goods or provider of services gets a refund of the taxes paid at all the intermediate stages of production or delivery. This helps in r
emoving the cascading of taxes and also improves greater tax coverage and tax compliance. After intense lobbying, the GST Council has succumbed to the pressure of excluding the restaurants and a segment of the housing sector from the input-tax credit chain. In lieu of that, both the sectors now attract a relatively lower tax rate ranging between 1 per cent and 5 per cent. Ostensibly, this has been done to bring down prices of end products and services. However, such exemptions have a long-term deleterious impact on the GST structure as more sectors get encouraged to demand similar treatment. The long-term goal should be to bring every sector under the GST coverage so that the benefits of a VAT system trickle down to all sectors of the economy.
One of the major features of the Indian GST has been its slow and tentative approach to issues. This has turned out to be a uniquely Indian strategy of incremental reforms to make them politically acceptable and their pain for the system more manageable. It has drawn the criticism that the GST regime was imperfect to start with, but its defenders argue that perhaps a slow and gradual process to reform the GST system to make it perfect over a period of time is a more viable and effective option. If the GST regime has survived the huge hue and cry in the early years of its launch, it is because of this slow and cautious approach. GST was disruptive, but its disruption was relatively more measured than in other countries, where the ideal model of the tax system was introduced, unmindful of the adverse consequences such a strategy would result for both the polity and the economy. India may have been spared that trouble. There is an equally convincing counterview to this assessment. International experience of the GST rollout has shown that a major tax reform like this does not usually get better over time. A GST system born with design defects, as the Indian GST system indeed suffers from, has a very remote chance of getting better in the course of its implementation. ‘The GST is like a baby that is the prettiest at the time of birth, and gets uglier with age. Of course, if the baby is born premature, a few months in the incubator can make it survive, but the incubator will not help rectify any of its congenital deformities,’ Poddar says ominously.2 On the one hand are countries like New Zealand, Australia, Singapore, South Africa and Canada, which started off with a relatively clean GST and have been able to stay clean. On the other hand, the European Union (EU) VAT system was a partial model with many flaws and compromises. Over the years, no reforms have been possible in the EU and the flaws remain uncorrected. The Indian GST has followed the EU model and the big question is whether India would prove the international experience wrong or fall into the old rut with its flawed GST getting more flawed over time. Already, some changes have been introduced in the GST, like the denial of input tax credits to a few sectors in lieu of lower rates, which have given rise to new anomalies and have compounded the distortions.
The Key Questions
With about two years gone after the launch of the GST, what would the government’s report card look like on the question of how successful its biggest tax reform has been? Was the GST a reform or was it just an implementation of a new but flawed tax system? Was it a positive disruption with the potential of huge long-term gains for the economy, tax policy and the taxpayers? Or was it just a disruption in regulated doses, keeping in view the limitations India’s political system imposed on any such reforms?
With the Constitution Amendment Bill excluding the petroleum products, alcohol and land, the die was cast for a basic design flaw in the GST that was rolled out from July 2017. Most modern GST systems in the world, like those in New Zealand, Australia, South Africa or Singapore, had decided to bring them under their coverage as soon as they were launched. The Indian GST excluded them with the provision that some of these products could be included later if and when the GST Council decided to follow such a path. But why weren’t these products included under it in the first place? No logic or reason for excluding them was given. The only possible explanation was that their exclusion would keep such transactions below the tax radar in the country. As Satya Poddar would say, ‘Their exclusion significantly dilutes the economic benefits of the GST reform.’3
The question that crops up is if the government could successfully resist the pressure from some manufacturing states like Gujarat to impose a 1 per cent extra tax on the GST, why could it not muster enough political courage to remove the other imperfections in the new taxation system? Was there a lack of political leadership? Did the leadership of Modi and Jaitley fritter away an opportunity to put in place a flawless GST and instead allowed themselves to be pulled away by popular concerns over the likely disruptions that a modern GST system would have caused, even though such changes would have been for the larger and long-term good of the economy, taxation policy and taxpayers?
Some of the blame for the lack of a forceful and visionary leadership to implement a flawless GST must also be shared by the top officials’ team that led the execution of the new taxation system. They had direct access to Modi and Jaitley and if they were convinced of the need to introduce a modern, flawless GST, it was possible they would have got the political leadership’s go-ahead for those changes. Could the officials’ team have been more receptive and responsive to feedback from tax experts, industry and trade? Such questions also arise because over and above the basic design flaw of the GST, the government also allowed a few imperfections to creep into the system. For instance, the rate structure, with multiple rates, did not look very different from the earlier tariff schedules that would take up hundreds of pages with schedules and exemptions. The denial of input tax credits in a few sectors, an inverted rate structure in some cases and the cumbersome procedures for zero-rating of exports were among the many imperfections that continue to undermine the efficiency of the GST system in India.
The final scorecard for the Indian GST, therefore, is a mix of some pluses and many minuses. It has undoubtedly led to a significant reduction in corruption and collusion between taxpayers and tax officials, thanks to a digital system of filing returns. The efficiency of the tax administration has also seen a commendable improvement as a result of automation and centralized processing through the GST network. The GST system has also seen most efficiency gains in the lower-income states. Compliance procedures have also been simplified in the two years after its rollout. The quarterly filing threshold has been raised to Rs 5 crore, as a result of which almost 93 per cent of the tax return filers are now enjoying the benefits of reduced compliance burden. The smooth introduction of the e-way bill system has plugged revenue leakage without any harassment. The growth in GST collections, a cause for concern in the first year or so after the launch, has also stabilized at a comfortable level in spite of the many rate cuts that were introduced in two rounds in the first two years. Concerns over revenue collections meeting the target have not gone away, but there are early signs of the GST system stabilizing.
However, the design flaws and the imperfections have continued to be a drag on the GST system. The benefits of reduced tax cascading have been limited to only 20 per cent, according to Satya Poddar. In sectors like electricity, agriculture and small and medium enterprises, there has been no reduction in tax cascading. The GST in India has certainly been a disruption. But whether it can reform itself further to address the design flaws and the imperfections is a question that will be answered in the years to come. That will also depend largely on the political will of the government. The safety net for the GST in India is the Constitution amendment that has now made it virtually impossible for anyone to go back to the earlier taxation system. But that is no comfort. The challenge is to move towards a GST that is flawless and has a better design.
Section 14
Disruptions Ahead
CHAPTER 27
INDIA OF THE FUTURE
The disruptions of the future are difficult to anticipate. Disruptions are an outcome of a combination of factors—social, economic and political. Forecasts on future disruptions are also likely to change as and when the objective realities change in the social, economic and political s
pheres. A disruption that may appear very likely to happen now may not look so a few years down the line or a few years earlier.
Could demonetization happen during the United Progressive Alliance government’s rule? Alternatively, could any government other than that led by Indira Gandhi have nationalized banks and triggered the biggest disruption in India’s financial sector?
The likelihood of future disruptions is intricately connected with the political regimes in power and economic and social conditions that prevail in the country at a given point in time. With these caveats in place, here is an attempt at forecasting twelve big disruptions that could hit India in the next few years.
India Going Presidential
The makers of India’s Constitution decided that India should be a parliamentary democracy. Broadly speaking, Parliament is supreme in a parliamentary democracy, wherein the leader of the government, and indeed every minister of the government, is accountable to Parliament. The leader of the government in a parliamentary democracy is not elected by the people. Members of the political party or a group of political parties that enjoys the majority of the lower house of Parliament elect their leader, who then is invited to form the government. If the leader loses the confidence of Parliament, he or she has to resign.
The Rise of Goliath Page 41