Memo To Modi: GST’s Success Depends On Trust Of Taxpayers, Else It Will Fail 

The changes announced by the GST Council on 6 October – to reduce the compliance burdens of small and medium businesses and provide relief to exporters facing a blockage of tax refunds – sent two contradictory messages. On the plus side, it shows that the government is willing to listen to genuine grievances. On the negative side, though, it is now apparent that the goods and services tax (GST) will take at least one or two more quarters to settle into a steady rhythm. This means revenue and economic uncertainties will remain with us at least until December, if not extend further.

Consider the decisions taken, and their implications for the system’s stability.

One, exporters have been promised refunds for July and August by mid-October, and an e-wallet system is to be introduced by 1 April so that refund claims do not result in cash flow blockages. This means we are into another ad hoc system for a few more months, and even by 1 April we will be experimenting with a new idea. E-wallets could throw up their own glitches and issues.

Two, the decision to raise the limit for the composition scheme from Rs 75 lakh to Rs 1 crore, under which small traders, businessmen and others can choose to avoid compliance as long as they pay a composite tax ranging from one to five per cent of turnover, will make life easier for those affected. But it is not clear if this scheme will be temporary or permanent. If it is temporary, it means the relief is only short-term. If it is permanent, it raises questions about giving an absolute number to the turnover limit when inflation or business growth is bound to bring the same businesses – assuming they are growing – into higher brackets, where they will have to start complying with GST as the others do. Moreover, this artificial limit will provide perverse incentives to doctor your turnover levels so as to remain out of the system’s tentacles. It will encourage avoidance rather than ensure compliance.

Three, the exemption from monthly filing of returns for businesses with upto Rs 1.5 crore turnover again faces the same problems as the composition scheme’s arbitrary limits.

Four, the decision to cut duties on 27 items may be good for the producers of those goods and services, but again sends the message that political pressures and short-term considerations can influence tax rates.

One need not judge these early changes harshly, for GST is still a new tax, but there needs to be some sort of a principles-based approach to changes rather than the GST Council merely responding to problems and pressures from various lobbies.

The fundamental flaw in the GST is not the rates or the rules, but, as V Anantha Nageswaran points out in a column in Mint, the obsession with revenue neutrality. Which means the government is afraid to let go of the bird in hand for two in the bush, when the ultimate aim of GST is to boost economic activity, followed by an uptick in revenues.

This is no way to reform. Reformers have to be led by a belief that reasonable rates will ensure better compliance, not that no loss must ever be suffered by the exchequer even in the initial phases. The purpose of GST is, as Prime Minister Narendra Modi said, to create a “good and simple tax”, but good and simple taxes must start with good faith and simple trust in your businesses. The purpose of the tax is to boost economic energies, not tax collections per se. The latter will follow from trusting your citizens, not from distrusting them.

All is not lost even now. If the government moves away from its obsession with tax collections and allows revenues to fall in the short run, it is fairly certain that revenues will actually buoy upwards in the medium term.

To expect the bounce to happen as soon as a tax is imposed is folly.

Here’s what the government can do.

First, cut rates in as many non-luxury goods and services as possible at the next GST meeting. Services must, in particular, be given greater reliefs, for GDP is 60 per cent services, and services tend to employ more labour than manufacturing.

Second, make the filing of returns quarterly for all companies, and not just those with a certain turnover limit. To prevent bumps in revenue collections, give companies a rolling quarter format, where the quarter is not April-June for all, but April-June for some, May-July for others, and August-October for yet others. This will smoothen out revenue flows, and also reduce the pressure on the GST Network architecture with everybody trying to file on the last date.

Third, for those choosing the composition scheme, one could index the turnover limit to inflation, or give them a glide path to growth and normal compliance by insisting on a timeframe within which they must shift. If needed, the government can allow small businesses to hire CAs at a subsidised cost, just as TRPs now help salaried employees to file tax returns. We should not place a premium on business remaining small.

Fourth, the government must create a fiscal cushion either by fast-forwarding disinvestment or by legislating a new black money disclosure scheme that is reasonable and can generate high short-term revenues. To prevent the impression that those who disclosed incomes earlier were fleeced while new declarants are getting a better deal, the government could extend the latest concessions to past schemes too, and offer tax credits to them. This will generate trust, and improve compliance.

Five, there should be a permanent panel on simplification of GST rules and regulations. This is what will ensure that we head towards a good and simple tax over a period of time.

The worst thing the government can do is to force the GST goose to lay all its eggs in the very first year of its introduction. We know how that story ends.