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One Nation, One Market

Anand Teltumbde (tanandraj@gmail.com) is a writer and civil rights activist with the Committee for the Protection of Democratic Rights, Mumbai.

The goods and services tax presents several challenges from weak regulatory systems to prevent profiteering, to inadequate long-term provisions for the needs of states. Not much has been said about how this economic policy is also a confluence of neo-liberalism and Hindutva, and assists in the building of a Hindu rashtra.

On 1 July 2017, the Goods and Services Tax (GST), a talking point since 2000 when it was first mooted by the Atal Bihari Vajpayee government, was rolled out, adding one more feather in the cap of Prime Minister Narendra Modi. The implementation of GST is being euphemistically projected as the biggest tax reform after independence, and hyperbolically compared to the political unification of India brought about by Vallabhbhai Patel in 1947–48 with the annexation of the princely states. GST is said to bring about the economic unification of India in the form of a single market. When the Manmohan Singh-led United Progressive Alliance (UPA) sought to do the same in April 2010, it was the Bharatiya Janata Party (BJP) that vehemently opposed it. The UPA presented three drafts of the bill thereafter but the BJP remained adamant in its opposition. Yashwant Sinha, the chairperson of the then parliamentary standing committee, had said that the GST should first be implemented at the central level by merging central excise and service tax. He insisted that the centre should “present an example to the states that this is how we do GST and then the states might follow.” Modi, chief minister of Gujarat at the time, represented the opposition from the states. In a complete somersault, his party and government today are going gaga over the roll-out of GST.

While there may not be much dispute on the desirability of a simplified tax structure in the form of GST, it all depends on how it is structured and implemented in a vast country such as India, with its diversity and constitutional complexity. While it may be apt to look at these aspects of the GST, it is more pertinent to understand the political agenda of the BJP that has pushed for its expeditious roll-out defying the wise counsel of experts against the risks involved.

GST was first conceptualised in the 1920s by Wilhelm von Siemens, a German businessman, as a destination-based tax levied on the consumption of goods and services. It was first introduced in France in the year 1954, followed by Japan, South Korea, the United Kingdom and Australia. It should, however, be noted that GST is not uniform across these countries; there being more than 40 models of GST presently in force.

Good for Union Government and Business

The GST is undoubtedly great for large businesses, and the central government, but not necessarily so for the states and the people. If abolishing state taxes under GST was a sure-shot way of creating efficient markets and economies, one would have expected the United States (US), the largest capitalist economy in the world, or the European Union, the second-largest common market in the world, to have at least considered GST for themselves. But they have not. In unitary countries (in which the central government has ultimate and full powers), value added tax (VAT) is itself GST; whereas in federal countries (such as India with both central and state ­governments), they become different tax structures. The model of GST India adopted is the dual GST model followed by only one other country, namely Canada. How relations between the states and the centre are structured in the GST scheme assumes paramount importance.

Expectedly, Finance Minister Arun Jaitley proclaimed that GST would lead to a 2% increase in the gross domestic product (GDP). He, perhaps, did not know that various others and agencies have surpassed his prediction. A US Federal Reserve research note stated that assuming the aggregate weighted GST rate is 16%, there would be a positive impact of 4.2% on real GDP. The International Monetary Fund (IMF) had predicted GST to help raise India’s medium-term GDP growth to over 8%. The World Bank held that a smooth implementation of GST could boost economic activity to push India’s GDP up to 7.2% in 2017–18 and further to 7.5% in 2018–19. Even our own National Council of Applied Economic Research (NCAER) has projected a 1%–2% increase in the GDP due to GST. All these predictions are based on the reduction in inefficiencies in the production process while eliminating the current compounding effect of different central and state levies. One need not discount this approbation by global capital, but one could sound a note of caution that they do not take into account the complexities that the Indian context poses.

Devil’s in the Detail

The most crucial aspect of this tax regime is the rates of GST for various categories of products. It is generally experienced that GST tends to be inflationary. For instance, Singapore saw a spike in inflation in 1994, when it introduced the GST. In India, the rate for revenue neutrality was being discussed at 27%. Although the standard rates have been pegged lower at 5%, 12%, 18% and 28% for some luxurious and demerit goods, there is an intrinsic tendency for them to go up once the new regime is stabilised and political antennas are deflected away from the GST. When one speaks of inflation, it follows as to which classes will be worst affected. The higher prices of many items of mass consumption, previously available without tax, having been brought under the ambit of GST are likely to hit the poor strata harder, whether the new tax regime achieves revenue neutrality or not. In lieu of this, many countries had instituted price control mechanisms when introducing GST. For instance, Malaysia—the latest country to adopt GST—was able to mitigate the risk of inflation, on account of the GST, with price control administered by the Ministry of Domestic Trade and Consumer Affairs. In India, there is a provision of a Price Monitoring Mechanism (PMM) in the Central Goods and Services Tax Act, 2017. However, experience reveals that such mechanisms utterly fail to control prices and instead, contribute to corruption.

The political opposition to the GST primarily arising from disgruntled states have been placated with the assurance of compensation for revenue losses every quarter, for up to five years, from a fund of ₹55,000 crore created with the levy of a cess on luxury and demerit goods. This, however, is a temporary truce. In the Indian system, the state governments do most of the actual governance. They administer the police, run schools and hospitals, as well as look after India’s most critical sector—agriculture. Under GST, states do not have the flexibility to raise tax except through the GST Council, which, according to its constitution gives the centre veto power over the states. This disconnect, between services and taxes in any federal country, is theoretically bad. But it may be worse due to India’s diversity. GST straitjackets all states with the same taxation system and grants them equal votes, undermining the reality that there is little or no similarity among Gujarat, Tamil Nadu or Jharkhand, and Tripura. One may surmise that divorcing the states from the process of taxation may prove to be a recipe for disaster in future.

GST undoubtedly brings supply-chain efficiencies in manufacturing but being a destination tax, it has an intrinsic disincentive to the manufacturing states. For example, states like Tamil Nadu, India’s manufacturing hub, had opposed the GST precisely due to this reason, as it saw a revenue loss of around ₹9,270 crore under GST. If one aggregates it in the context of the states’ inability and unwillingness to attract investment in manufacturing, it may outdo the process efficiencies and become a veritable economic disaster. Already, the states’ revenue anxieties have resulted in keeping sectors like alcohol, tobacco, and certain petroleum products out of GST for an uncertain length of time. The present high taxation structure for them is to continue. The consequent break in the GST credit chain, at either end of the supply chain, will entail substantial cascading burdens which have surely not factored in the ecstatic predictions of GDP growth. Then there are sectors in India where the entire chain of production entails no tax payments and deals necessarily in cash, and so also the markets in cities (not to speak of villages) across India, where business thrives without any trace of documentation or credit payments. Another factor is the resource­fulness of India’s trading and intermediary class in devising ways to beat the system. Their ingenuity in squirrelling all their illegal incomes into nearly 18 lakh dubious bank accounts, with an average deposit of a whopping ₹3.3 crore, during demonetisation is a case in point. This core ­constituency of the BJP must not be underestimated in defeating, even, the GST regime.

Onward to Hindu Rashtra

The haste with which the BJP pushed this project in less than nine months (against 18 months in the case of a small country like Malaysia) indicates how keen it is in seeing it through. Experts continue to be sceptical about the state of readiness of millions of enterprises in India, the banking system, and the information technology (IT) architecture in the form of the GST Network (GSTN). But with the same recklessness and bravado as displayed during demonetisation, Modi has steamrolled the GST prematurely. Like all his schemes, GST, too, may raise some dust as the rest is managed by Indian jugaad (hack or innovative fix). Meanwhile, a polarised polity will help uphold anything and everything that Modi does.

The BJP, unlike any other party, has a definitive ideological agenda behind every move. The economic discourse on GST tends to miss out on an essential aspect of the reform, namely its contribution to the political construction of the Hindu rashtra. GST helps in homo­genising India, a la “one nation, one market, one tax,” which indeed was the BJP’s slogan for GST. Alas, ground realities led it to compromise and reconcile with a dual GST model and a complex system of four rates and additional ­levies that removed the third clause of “one rate” from its slogan. Yet, the remaining clauses are indicative of not only a confluence of Hindutva and neo-liberalism, but also reminiscent of Hitler’s “ein volk, ein reich, ein führer” (one people, one nation, one leader), much adored by the Sangh Parivar. The GST in its current form, irrespective of its fate—Modi is capable of making even his worst failure seem a grand success as in demonetisation—is a leap towards the Hindu rashtra.

Updated On : 7th Jul, 2017

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