The modifications of the procedures and rates of the goods and services tax have, quite predictably, drawn sharply partisan responses. This is not surprising in view of the fact that India is, once again, in the throes of a mini-election season. The results, when they are finally announced on December 18, may not suggest a close fight. However, in the midst of an election campaign, all elections appear to be bitterly contested – as they undoubtedly are, despite whatever the final outcome reveals.
The Congress, now experiencing a social media resurgence of sorts, has seen the changes as Narendra Modi’s panicky response to its aggressive onslaught against the GST, which it has colourfully dubbed the ‘Gabbar Singh Tax’. Congress supporters quite genuinely believe that the cumulative effects of demonetization and GST have alienated vast sections of the population that were earlier committed Bharatiya Janata Party voters. There is a belief that the modifications in the GST regime have come too late and this alienation, coupled with caste discontent in Gujarat, could result in a spectacular electoral upset in the home state of the prime minister and the BJP president. This belief has been nurtured by a section of the English language media that has been waiting expectantly for anti-Modi sentiments to grip the public mood. What didn’t materialize in Uttar Pradesh is expected to finally see the light of day in Gujarat, a state that the Congress had written off a few months ago.
On its part, the BJP has not been sitting idle. The first anniversary of demonetization was used by the party to mount an aggressive campaign that tried to paint the opponents of the November 8, 2016, announcement as patrons of corruption. The finance minister, Arun Jaitley, circulated an article that richly documented the colossal financial gains from demonetization. These included the revelation that the past fiscal year had seen an additional 56 lakh people filing tax returns and about 42 per cent increase in advance tax collection by non-corporate taxpayers. The finance minister also revealed that there were suspicious transactions involving Rs 1.6 lakh crore to Rs 1.7 lakh crore that the tax authorities are investigating. The implication was that demonetization would bring in a huge revenue haul for the government.
It is important to note that the BJP commemorated the first anniversary of demonetization as ‘Anti-Black Money Day’- an indication of the extent to which the Modi government has put the ethical transformation of India at the centre of its political strategy. As the architect of this conscious strategy of creative disruption, Modi appears to have calculated that the wider regeneration of India has to be both economic and moral. The moral dimension was perhaps uppermost in his mind when he undertook demonetization, fully aware that there would be at least a short-term disruptive effect on the economy.
At one level the GST, which had been on the drawing board of different governments, was focussed on the need to create a seamless, pan-Indian market. Certainly that is what excited the imagination of the global community and Indian corporates looking for improvements in the ease of doing business. However, there was an important ethical dimension that was in-built into the new scheme whose significance was not initially realized. In simple terms, the system of interlocking payments and credit made it difficult, if not impossible, for traders and manufacturers to create a zero-tax zone for themselves.
The implication of this interlinked GST was quite awesome. For long, a section of India’s trading community had created an innovative business model whereby the competitive edge of their enterprise was provided by zero tax. With GST, these units found it impossible to do business without either paying the new tax or attracting the attention of the tax authorities. Some simply shut shop while others reinvented themselves by coming overground. It is impossible to assess the scale of the disruption caused by the forcible closure of India’s umpteen tax-free zones, but it would be safe to hazard a guess that many individuals, including those with local influence, have been very adversely affected.
It is entirely possible that Surat, an important centre of the textiles and diamond trade, had a tradition of sharp business practices that were kept well below the radar and which needed the GST to bring to the surface. Whatever the reality, GST witnessed a grand alliance of zero-tax businesses of all sizes against the Modi government’s bid to enlarge tax compliance. Rather than openly advocate tax avoidance, the anti-GST agitators picked on two issues that warranted attention.
First, they complained, quite legitimately in my view, about the heavy burden of compliance norms that would divert attention from running a business to filling endless forms. This is a problem the designers of the GST should have anticipated. Unfortunately, the finance ministry appears to have jumped into the new taxation order without sufficiently taking into account how business, especially small enterprises and those barely accustomed to maintaining proper books of accounts, would face up to the challenges.
Second, GST was a grand experiment in pooled sovereignty involving the Centre and the states. For the states in particular, the new tax was a leap into the unknown and was preceded by concerns over shrinking revenues – one reason why they were loath to give up their claims on the taxes on petroleum and alcohol. A consequence of this wariness was the inclination to create multiple tax slabs and put too many items into a higher bracket. For the sake of rushing through an agreement and meeting a self-imposed deadline, the Centre went along with a fine print that contained many inherent flaws.
India has some important election or another each year. It was perhaps fortuitous for those hard hit by GST, such as the enterprising Surtis, that their mounting anger coincided with the Gujarat assembly election, a time always conducive to responsive governance. By honing in on the grievances of the proverbial small guy burdened by an uncaring State, the real instigators of the anti-GST stir in Gujarat kept the gaze away from the real issue: the sustained non-compliance with tax regimes, both past and present.
It would be fair to say that by forcing modifications in the GST system, the Surat traders very successfully blackmailed the government. However, what is important to note is that the government was responsive. Actually, the ability to modify and tweak programmes mid-stream when necessary has been a feature of this government, as noticed by the frequent alteration of rules to respond to unique situations during the demonetization exercise.
GST being a joint Centre-state tax, it is impossible for the Modi government to make changes unilaterally. However, the pressure from below was sufficiently strong to compel the Centre to use all its political clout to persuade the GST council into making a series of important modifications, including relaxation of procedures and the lowering of rates. Where the Centre has so far been unbudging is on the larger issue of compliance, the basic minimum requirement of an ethical economic system.
In the course of the past year or so, the Modi government has forced through a series of radical reforms that other governments lacked the will to push through. First there was the Aadhaar legislation that is a plug against welfare leakages and a potential anti-tax evasion instrument. Then there was demonetization that helped provide an address for unaccounted wealth and swelled government revenues. And, finally, there is the GST which, perhaps unwittingly, has helped establish the principle of lower tax rates and higher compliance. Few governments can boast such a record in so short a time.
