Why is a large country such as India unveiling a horse which will very soon end up being a donkey? Let’s put that down to good intentions getting the better of good economics.
Indian media is going gaga over the proposed GST with highfalutin phrases such as “the greatest reform since independence”. Bureaucrats and political showmen are patting themselves on the back. Erudite taxmen and accountants appear on channels to tell us how this tax is going to add magical percentage to the GDP, and how the Indian businessman is at last going to be set free to do his thing. Mouth-watering stuff. Many in the ruling party can already see us roaring past that great economic dragon to the north, China.
But the fight between the Center and the states, which is based on faulty understanding of economics, has turned the whole exercise into a sham.
Look beyond the hubris, the truth stares you in the face. The Central government is the sole monetary gorilla in the country. The one with its hairy hands on the money pump. Its actions determine the money supply and the inflation rate at any point of time – the only monetary indices that matter. Taxation is an integral part of its control mechanism. It’s not the job of the state government to tax and spend. The job of the state government is to attract private investment and to ensure reasonably full employment. To fund its public infrastructure works it needs a partnership with the Centre to determine what will be spent and how to price its recovery so that the cost doesn’t get amortized into private consumption. Other than this the State government’s only job is to maintain social harmony and enforce the law.
An overhang of bad economic theory has resulted in the states assuming that they need to tax in order to fund their infrastructure and social spending. This makes the state governments unnecessarily touchy about their tax structures. They do not realize that taxation is just a part of inflation control in the monetary system. So instead of fighting for a better deal for actual funding from the Center, they fight for how much should their share be in the taxation system. Unfortunately this fight has led to both the Central and State governments agreeing to break up the GST into multiple GSTs – CGST, SGST and IGST. To that add atleast 4-6 different tax rates. And again add the complication that these multiple GSTs have led to the need for assesses to file multiple returns. And if they have branches in different states then the multiple multiplied by another multiple.
The horse has truly become a donkey.
How could all this have been avoided? First the Central government should have a system where it finalizes a funding plan for each state for all their infrastructure programs that is independent of the taxation system. After all, the Center is the creator of money in the country. Second, the GST should have been devised as a part of the monetary mechanism to control inflation. Third, this mechanism should have been a single rate, single agency tax with primary care to ensure the assessment and collection system does not overwhelm the assesse. And the State governments need not have been burdened with collection of the tax.
Some would say that this would create a mai-baap relationship between the Center and the State and this would not work in a country which has different parties ruling different states. What would a BJP government at the center, for example, do when a communist ruled state asks for funds to run subsidized canteens? The carp would be that the communist government was pandering to populist sentiments for the sake of votes. There would be two ways to deal with this. One, give each state a set amount of funding based on some formula, and the states would be free to decide what they would spend it on – welfare or infrastructure. The second would be to loan the amount if it is for welfare, and ask the state government to recover higher user fees on its other infrastructure projects so that the money borrowed for welfare can be paid back. I would personally opt for the second one as it creates a discipline in the system akin to a private borrower taking a loan from a bank. The terms of such funding can be agreed upon in a council of states meeting where a system that is fair to all states can be voted on.
However, it seems futile to argue against what is to be introduced at the stroke of the midnight hour on 1st July with great pomp and glory. Cometh the hour, cometh the donkey.