GST: How poor planning and election panic toppled India's transformational tax reform
Rewind three months from now, and you wouldn’t find a single noteworthy voice who did not sing praises of “transformational” Goods and Services Tax (GST).
Key ministers and revenue officers were found conducting special classes on TV channels to explain how the input tax credit will turn India into the world's cheapest market for consumers. BJP spokespersons gave us long sermons on how GST will suck the tax thieves out of India's small and informal trade and industry.
Despite knowing the fact that the then-upcoming GST was flawed and highly convoluted, the government's economists tried hard to convince us with the theories of GDP acceleration through so-called formalisation (squeezing of SMEs - India's largest self-employer and job creator) of the economy.
However, in just three months after its mega midnight launch, the government seemed to have cut its own wisdom tooth on GST by staging major rollbacks.
Reforms diluted
Enhancing exemption limit under composition scheme and making provision for quarterly instead of monthly returns for businesses up to 1.5 crore are the two major compromises the GST Council had to acquiesce to in its 22nd meeting.
This will push almost 90 per cent of the businesses out of monthly compliance and will leave GST regulations applicable to only 10 per cent assessees. No surprise if even biggies are moved to quarterly returns soon. Quarterly returns will make real-time invoice matching and tax credit delivery impossible, thus making the GST similar to the predecessor system except for higher taxation on consumption.
GST Council has also tweaked the GST rates for the third time in just three months, which says a lot about the flawed implementation of GST.
The rollbacks announced on Friday, October 6, coated in the narrative of “sensitivity to the realities”, has virtually turned GST into a non-reform.
Now, the obvious question is why the government couldn’t see the problems that they see now, earlier? Ignorance, definitely, can't be a reason; hubris might be.
Regular readers of this DailyO column may recall that in the last two years while chasing the GST build-up amid euphoria, we had consistently cautioned on possible pitfalls of this reform and predicted a chaos similar to demonetisation.
The turning point
By mid-August, with the extension of GST return filing dates, it had become clear that the high-profile GSTN has let down India's major tax transformation. However, GST council was convinced on a quick fixing of GSTN and preferred to wait till October-end. A special committee led by Bihar's deputy chief minister had been tasked to repair the GST while it was sailing.
Why the major roll-back?
It was the collapse of politics and economy in tandem. If sources are to be believed, a recent ground survey report of revenue department on GST has thrown the government into a state of panic. The survey, first done in Gujarat, revealed the dire state of GST implementation and huge loss of business on the ground.
The survey has pointed out that except biggies, majority of small traders have neither information nor wherewithal to meet the knotty compliance requirements. State revenue administration was also found entirely ill-prepared to handle the mammoth transformation.
Political circles have echoed the same panic with a special input on how traders are building a silent nationwide campaign against the Modi government. After Rahul Gandhi's road show in Gujarat and feedback from RSS, BJP was more than convinced that GST might take a serious toll on its electoral fortunes in at least the immediate state polls.
The GST retreat is driven by economics as well. The unexpectedly low revenue collection and high demand for input tax credit in July and August have sent a chill down North Block’s spine. Owing to steep economic slowdown, the direct tax collections are below the targets and fiscal deficit has reached 96 per cent of the annual benchmark. GST-shocked exports have made the situation even more complicated.
Who is accountable?
GST has now been substantially diluted to assuage the traders’ anger on the election eve. We don't know whether heads will also roll after the roll-back, but the government is liable to answer a few questions to the nation.
1) Why GST was implemented from July 1, when it could have been launched by September 15 with better preparations. Most of the GST nations gave substantial time to their businesses for the transition. Who will bear the massive losses due to government’s haste and misadventure?
2) Why did green, evolving and unproven GSTN push itself down the throat of the digitally-challenged trading population? Will the responsibilities be fixed for the big GSTN mess-up?
3) Who or what had stopped the government to take cues from prior studies on GST's possible impact on businesses, consumer prices, government revenues and preparedness of stakeholders like other GST nations?
4) Why did government not go for structured rate reforms in Excise and Vat before moving to GST? Bypassing rate reforms and opting for absurd fitments of duty have made GST even more retrograde than what earlier dispensation presented.
GST is probably the only mega reform in recent history which has faced an embarrassing retreat before the latter could even move its wheel. After the rollbacks, the GST left us with neither improved compliance, nor was good for government revenues and economic growth. The GST's three-month journey from being “transformational” to “sensitive” (politically) has only turned the tax regime costlier for consumers more than earlier.
The GST climb-down, preceded by the futile demonetisation, exposes how shoddily the governments may go ahead with big and complicated reforms without taking into consideration the consequences. The two back-to-back poorly implemented reforms also suggest how disconnected popular governments could be with the ground realities.