Modi Govt and Common Sense of GST

In a democracy nothing makes a politician see things as clearly as an election result that goes against him.

With the recent loss in the assembly elections, prime minister Narendra Modi and the Bhartiya Janata Party (BJP), seem to be waking up to the several self-goals they scored on the economic front, over the last few years.

A big self-goal was a hurried and a botched-up implementation of the goods and services tax (GST), with many slabs, high rates of tax, too much procedure and a very moody website, which tended to shut down or go slow, when needed the most. Of course, this had an impact on the overall population in general and the trading community, which is a huge supporter of the BJP, in particular.

With the 2019 Lok Sabha elections around the corner, PM Modi is trying to correct for the botched-up implementation of the GST. As he said yesterday: "All things related to common man will be 18% or below that... 99% articles will be 18% or below 18% rate."

Even at 18% or lower, there are three rates to deal with (5%, 12% and 18%). This makes the system difficult for those who have to follow it. A simple point which both the bureaucrats and the politicians don't seem to understand. It is easy to see why the bureaucrats don't get it. They have no skin in this game. But the politicians at least need to get this, given that they have elections to fight every few years. GST has negatively impacted a large section of the nation's informal economy, which has votes.

India is one of the few countries in the world with so many GST rates.

As the World Bank pointed out in a report: "The Indian GST system currently has 4 non-zero GST rates (5, 12, 18, and 28 percent)... Most countries around the World have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only 5 countries including India use four rates. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana. Thus, India has among the highest number of different GST rates in the world." We are clearly not in great company here.

Other than having too many rates of tax, India also has one of the highest tax rates in the world, when it comes to the GST. As the World Bank pointed out: "Comparing the design of India's GST system with those prevailing internationally, we note that the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28 percent, which is the second highest among a sample of 115 countries which have a GST (VAT) system and for which data is available."

While taxing 99% of the items at 18% or below is great, as it lowers the high tax rates, it still doesn't solve the problem of one too many rates. The fact that having too many rates and high tax rates, is clearly not working for the government can be seen from the GST collections this year.

In the first seven months of the financial year, the central GST collections have been Rs 2.62 lakh crore. This is not even half of the target of Rs 6.04 lakh crore, which was set when the budget for this financial year was presented in February 2018. (Don't fall for all the claims of Rs 1 lakh crore GST collections made every month. This is the gross number which includes GST that has to be shared with state governments. It also includes refunds that will have to be made in the months to come).

Life has very few universal truths. But one universal truth is that human beings do not like paying taxes in any form. In this situation they will do everything they possibly can, not to pay them. Given this, any successful tax system basically has two attributes: 1) It's simple to follow. 2) The rates of tax aren't very high.

The Modi government's GST system fell flat on both counts. Of course, bureaucrats love a complicated tax system (or a complicated anything for that matter) because that is how they can stall the functioning ease of the system and make money in the process (Or rents as economists like to call it).

Once we take all these factors into account, it's easy to see why a single rate of 12% or 15% GST would have worked out for the best of everyone. But that wasn't to be, even with the BJP governing so many states.

Having said that, the country has now been on GST for more than a year and there is enough evidence to suggest that the current GST design is clearly not working. Hence, it's time for a huge course correction.

Governments botch up on implementing policies all the time, given that they are run by human beings. But a bigger mistake it to keep running a botched up policy.

Time for that to change is here. Hence, the common sense that should be inherent to any tax system should be allowed to prevail in the case of GST as well.