Is GST a magic wand

The Goods and Services Tax Bill, officially known as the Constitution (122nd Amendment) Bill 2014, proposes a nationwide Value Added Tax. It was originally intended to come into force in June 2016, but that deadline passed due to the usual political acrimony. Now it seems likely to become law soon. Congress vice-president Rahul Gandhi had a meeting with senior party leaders on how to make a virtue out of necessity. Most other parties, that had joined the Congress to stall the bill in the Rajya Sabha, have now either seen the light or negotiated happy terms, or both. But what is this bill

GST is intended to be a comprehensive indirect tax on the manufacture, sale and consumption of goods and services across India, replacing taxes levied by both the Centre and states. The authorities claim GST will be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. This will enable GST-registered businesses to claim tax credits to the value of GST they paid on buying goods or services.

It is generally felt this will be a major step in reforming India’s indirect taxation. GST will eliminate the cascading of several Central and state taxes with a single uniform national tax. It is expected this uniformity will remove tax disparities and intermediate barriers making some states more competitive than others in attracting investment. It will more or less eliminate barriers against inter-state movement of goods and commerce, and remove inter-state price differentials.

It will thus create a seamless national market, which many hope will further unify the country. This might be a trifle exaggerated, as there are economies like the United States that are fragmented by highly individualistic state laws, and yet manage to grow and prosper.

But there’s little doubt it will make life much easier for all engaged in the manufacture of every product or service. In modern manufacturing, most goods are outsourced and the manufacturer is usually little more than an aggregator of supplied parts, components or sub-systems. GST will certainly eliminate the waste associated with complex bookkeeping. Its simplicity should make administration and enforcement much easier.

Most intermediate taxes are substantially evaded and the complex bookkeeping makes it easier to hide the evasions. This should be largely reduced, taking the GST Bill close to being a reform in the truest sense. It is likely consumers will also benefit with lower taxation. But some may think otherwise, as the scope for sales tax evasion at the point of purchase will also be reduced significantly.

Whatever its likely benefits or otherwise, this bill and the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill 2015, popularly known as the Land Bill, became symbols of the Narendra Modi government’s ability to speed reforms. The BJP adopted the GST Bill as its own after years of opposing it, fighting for the rights and specific interests of states it ruled. It had stalled all efforts by previous governments since 2007, and it was quite evident that the Congress was keen to hoist the BJP on its own petard by making it a symbol of the NDA government’s inability to step up reforms.

Every so often the enactment of a policy assumes a certain urgency that makes it appears as if it was a magic wand to banish many of our problems. Mostly, these notions become so due to the spin by protagonists, lobbyists and journalists looking for a star to hitch their wagons on to. Back in the Rajiv Gandhi era, Capt. Amarinder Singh, then a recently-elected Congress MP from Punjab, lobbied for Pepsi Cola’s entry into India. The argument was that Pepsi’s bottling would create tens of thousands of new jobs and huge tax revenues. He had also argued that the “promise” of Pepsi sourcing tomato ketchup for its pizza outlets from then militancy-ravaged Punjab would be a quantum boost to it, with lucrative tomato and capsicum farming and introduction of new food growing and processing technologies.

Pepsi came, and Coca-Cola soon followed, and while people like Sachin Tendulkar, Amitabh Bachchan, Aamir Khan and M.S. Dhoni made millions, Punjab’s farmers were left with little more than hope. But for a brief period it had become a seemingly vital bridge to cross on the road to national prosperity. At another time it was KFC and McDonald’s, later it was FDI in insurance, retail and real estate. More recently it was the civil nuclear deal with the United States.

These bridges were often crossed, and sometimes the crossing, as in the case of FDI in retail, got postponed. After the Modi government came to power, we had the Land Bill and GST Bill assume such dimensions. It was as if their passage was proof of India’s eagerness to “reform.” Some “litmus tests”, usually administered by the Western media and domestic lobbies close to Western commercial interests, have passed, others haven’t. The Land Bill just got dumped, but land acquisition either for the common good, or for private enterprise, has not been a hindrance. Land was always a state subject and the states are always keen on new projects. Only, now land can’t get expropriated as in Singur or Kalingapatnam and given to businesses or infrastructure. Acquisition has become fairer, and the economy didn’t get derailed.

Despite everything, our economy has been bounding along quite happily, and the worst fears of business interests opposed to “reform” haven’t come true. KFC is still trying to gain a foothold in the fast food business, just as Pizza Hut and McDonald’s are. The expansion of Pepsi and Coke led to huge revenues for the state and the MNCs. And collaterally, diabetes became an epidemic, creating an entirely new market.

The civil nuclear agreement with the US came into force, but not a single paisa of investment has taken place after almost a decade of acrimonious political discourse. But the heavens haven’t fallen, and the gap between electricity supply and demand has narrowed enough not to cause too much worry. The point is: a giant young nation’s march is like the flow of a fast-flowing river. It just goes around obstacles or over them. India moves at its own pace, but the pace is stepping up, despite its politicians. Unlike China, where people are led, in India the democratic process leads, and determines the pace of change.

The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.