GST – Phase 2

We know how things work in India – you try to spend years, often decades in a vain hunt for the holy grail of any law or reform move. By then costs mount, direct and indirect, but who cares? Because the poor beggar whose son grows up to be a beggar & is doomed to poverty all his life will not connect his misery to delays in implementing GST or getting that airport built.

But then after all this delay, finally when things get done, they don’t show the perfection expected of such long effort. It as if Kamal Amrohi spent 20 years making not Pakeezah but some usual Bollywood masala trash. This is because the exact same issues that kept the process tortuous have not vanished but have simply resulted in compromises and optimisations that almost manage to defeat the purpose.

Strangely, all of the above applies equally well to other divisive democracies with distributed powers like USA. But then they are rich and can do with lousy healthcare law or Sarbanes Oxley sort of nonsense but we cannot afford to do so.

As far as India is concerned, this is true whether Congress, BJP is in power directly or through messy coalitions.

But then the mere fact that reforms get done in of itself is a major achievement that cannot be underplayed. In fact, that is the only way things can get done. You can wait for perfection another 20 years, and it aint gonna happen.

That is the story of GST too. We cannot stop congratulating and thanking Jaitley, Modi & Co for getting it done. No mean achievement.

What next?

But having done that and benefit of hindsight what else can be done? After all the present law is merely a first step in a long journey.

Arvind Datar and Vaitheeswaran (Indian Express, 28 Sep 2017) have written an excellent piece on this topic and instead of the usual nasty sarcasm, useless criticism and agenda driven venom that passes for journalism in India these days, have given sensible suggestions that is almost a to-do list. Hats off.

Similar sentiments were expressed in our earlier article on this topic – link here.

Adding to the excellent to-do list mentioned above we would suggest the following

1. Get contiguous BJP ruled states to go whole hog and include petroleum, real estate and whatever else is left out into the GST net. That is almost all of India these days! This creates competitive pressure on rest to reform or literally perish as businesses votes with their feet. This is a lot faster than arguing with megalomaniacs and anarchists like Mamata Banerjee & Arvind Kejriwal who will never agree to anything sensible just because it came from Modi. We say contiguous because goods can freely move (with necessary input credit) without having to cross a non-compliant state.

2. Announce that for the first one year, there wont be any penalties (beyond recovery of tax due) on anything other than wilful and wanton tax evasion, that too narrowly defined and clearly listed out.

3. Give taxpayers option of accelerated refunds with the condition that should they prove to be cheats, the law will come down on them like a ton of bricks. Yes, this may expose the revenue to some risks but the benefits will be considerable too. Known offenders, tax defaulters can be left out.

4. Go easy on minor delays in filing other returns such as Company Law, Income Tax etc. because the same bunch of people (Accountants, CAs etc) that are busy decoding GST also are responsible for those tasks and must be tired and exhausted. Remove useless returns, forms, filings that waste time and don’t bring any benefit to any stakeholder. In fact a general amnesty in that direction announced ahead of time is a great PR move and costs nothing.

5. Study the GST credit system of Singapore where ordinary poor (by local standard) taxpayers were given money for first year or two. Nothing works like free money to soothe irritated public mood. It need not be substantial but should not be trivial.

6. Make small but effective steps towards single rate, each month, every month. No need to wait for big bang reforms and endless arguments. Perhaps a good start is Pistachio, Cashew, Almond and Walnut all of which have different rates as one wag pointed out!

Reform is not easy. But rewards can be huge. Indian voters have shown this many times.

 

 

 

 

 

Fixing the “slowdown”

To anyone seeking a masters degree in left propaganda yellow journalism, Indian “liberal” media and its constantly shifting narratives offer a practical course that no University can provide. That too free of charge! Pity they don’t issue a certificate upon completion.

You may recall the concerted campaign mounted hardly 6 months back about “manipulated statistics” & “cooked books” that made India’s GDP growth more than what it “really” was. Of course, it was all laid at the door of Narendra Modi who, we were told is doing this to hide his many failures. No amount of explanation by professional statisticians in the government (none of whom were appointed by this regime) mattered. While some genuine economists had genuine questions about changed methodology etc (which are never static), it was mostly propaganda noise by faithful media warriors of the left + Congress continuum that reached high decibels.

Now once the govt announced that growth slowed to 5.7% in the latest June 2017 quarter all this talk died down and vanished like a ghost. In its place another narrative – that India’s economy is in a “tailspin“. It is no one’s case that economic growth is doing fine but surely tailspin is not the most appropriate word for a rate of growth most developing countries will happily report? Apart from the tailspin narrative, it was all talk of gloom and doom and what Modi should or should not do to stop this free fall that was a product of his own miscalculation.

Arvind Panagariya, until recently Vice-Chairman of the NITI Aayog (whose departure created yet another wave of senseless speculation and innuendos), wrote a brilliant article for TOI advising caution and putting the numbers in perspective. All was not lost and there is no need for desperate measures. Other op-ed writers including the likes of Mihir Sharma who is not exactly Modi regime friendly echoed the same prescription (not to loosen purse strings at cost of fiscal stability) but of course differed on the cause and magnitude of the problem.

In this context what should be the “common sense” approach for the Modi sarkar? We summarise them below.

  1. There’s lots of low hanging fruit in the ‘ease of doing business’ department. Most of them do not need ANY legislative change, just mindset change. PM Modi should ask each of minister to abolish just 1 form or return each week. We have mentioned this earlier, but any SME that chooses to incorporates itself into a Pvt Ltd company files a lot more returns and faces tons of paper work that companies in Malaysia or Singapore don’t face at all.  Among other negative effects, this (plus various other reasons) forces Indian startups as well as established companies to setup holding companies there and raise funds in Singapore instead of India!
  2. A give and take approach to labour law reform. Unions can be asked to tick off reform measure they will approve happily in exchange for benefits and facilities that they need and is fair. Implementing incremental changes in India is lot easier and better than “boil the ocean” types that take decades. Not only that within existing bunch of labor laws one can be 400% sure, as Musharraf would say, there is scope for procedural simplifications, speed up of decision making etc that will keep things going and can make a major change.
  3. That brings us to the next topic – speed up the administration. We in India always think of constitution changes, major laws with draconian clauses etc to fix problems for which much simpler solutions are available. Even if a particular law or Act requires ten steps, where one would be adequate, there is NOTHING in any Act that says don’t do them fast and in fair manner! What is stopping successive regimes from simply cranking up the motor? It is here that Modi has, in our opinion, failed to make a major difference.
  4. To give a simple example, opening a restaurant in USA or Germany or even Singapore is not easy. It may require permits relating to Fire, Food safety, Workers welfare and safety, Building Code, Hours of business, Parking etc from many departments scattered over local, federal and state levels. But the key difference is, at each of these places, rules are transparent, fair, available and accessible and one doesn’t have to bribe desk after desk to move papers. So what is desirable and quicker? Amending or integrating 100 different laws (as our labor Ministry is trying to do) fighting through a thicket of resistance from entrenched babus and the ‘system’ or simply looking at implementation speed and fairness of process?
  5. Bypass the banking system to provide funds where it is really needed, perhaps through existing or dedicated development bank. This can be done for quick win projects that create jobs. Again quick to do while debates about who takes the hair cut and how much can go on for another 20 years in the regular banking system. In fact, there are even doubts if private businesses are keen to borrow and spend on capacity even if funds were available on demand until existing excess capacities are taken care of.
  6. Go easy on harsh and punitive measures particularly in relation to GST. The last thing that one wants is depressed sentiments and fear psychosis caused by overzealous and often corrupt bureaucrats raiding and destroying genuine businesses because there are “errors” in returns that no one understands. There is time and place for that kind of measures.
  7. Get more funds from rich friendly nations on soft terms like the one for bullet train project – but for spending on projects that create immediate jobs, kick start consumption and give booster shot to the economy without wasteful expenditure. Japan, Saudi/UAE (but not Beijing) and others that work on government to government levels and who have already promised cooperation are obvious targets. This is far better than borrowing domestically that crowds out others and pushes up rates.
  8. Go faster on reforms that stir the pot and send the right signals but do not bog down the entire government with lots of resistance. Air India is one good example. There are dozens more. Speed of action is of the essence here, without compromising on transparency. Extensive land reforms can wait for Term 2 for precisely same reason. Plus they don’t give results for five or more years. Correspondents of Financial Times and Washington Post do not vote in Indian elections.
  9. Fill up government posts where new recruits are put to productive use. This not only makes electoral sense but is also eminently do-able given the shortfall in many critical areas. Delivery and governance are suffering even as excess staff who cannot be re-trained or re-deployed act as drag elsewhere.

Hope the next few months are full of action that will show results by early 2018 because it may be too late if results come too close to 2019 May. Just check with A B Vajpayee!

 

 

 

Surat textile strike against GST

Surat is perhaps India’s largest textile manufacturing as well as trading center. It is in the state of Gujarat which is BJP as well as PM Narendra Modi’s stronghold. In fact Modi as Gujarat CM resisted GST because it is one of India’s “producing” states and GST, being a consumption based tax, is favorable to “consuming” states like Bihar or UP which have very little manufacturing but huge populations.

As we have highlighted in our earlier article, GST, in addition to bringing large parts of underground economy into the open, also facilitates better Income tax compliance. Once dealings are recorded, tax evasion, not just of GST but even other taxes like Income Tax, becomes that more difficult.

And everyone knows that while the salaried class and even large sections of organized business sectors pay taxes and have less means of evasion, the small and medium sized traders that dominate the textile sector carry out their entire business in “black”. This means not just no sales tax or very little, but no Income tax.

It is to protect this illegal and damaging modus operandi that Surat based textile traders went on strike soon after GST was implemented. Markets were shut down for weeks and blatant threats issued to BJP that they will “pay” in votes should they not be allowed to continue with their tax cheating ways.

This article in Indian Express explain the motives quite clearly.  “Traders readily concede most of their business was “unaccounted” in order for them to avoid income-tax”. Here is another article that narrates how a nosy Excise inspector was thrown into the boiler!

In fact this strike has been one of those rare highly publicized cases of post GST disruption and troubles. In fact, anti-Modi rags like Wire were reduced to playing up this strike, for want of “better” news. This article, full of hyperbole about the negative impact of the strike in terms of livelihood etc., surprisingly completely omits the tax evasion aspect of the strike, which is in fact its main trigger!

Of course, one can readily imagine how Wire would have played it if Congress or CPM was in power. The strikers would be labelled Sangh parivar fascists who are looting the poor and deserve still jail terms!

Arun Jaitley and Narendra Modi should take up this gauntlet thrown by Surat traders head on. The workers affected by this senseless strike should be helped to tide over this difficulty as well as educated on the real reasons behind this strike. While their daily purchases are taxed, it would be cruelty if their masters don’t pay any tax on their much fatter earnings. Our socialist warriors and their propaganda mouth pieces that shed copious false tears for the “sub-altern” instead of highlighting the real story, choose to fish for anti-Modi sound bites instead!

The strike also highlights how entrenched corruption, cheating, tax evasion is in India to the extent where they become “rights” for which open agitations can be launched.

Genuine and reasonable demands, such as extra time for filing returns, simpler paperwork, protection from corrupt officials etc., can be and should be provided, of course. That is no excuse to demand complete exemption from tax laws of the country.  As the FE article cited says quite clearly “If the government stands firm, this protest will fizzle out ultimately. But if it budges, it will encourage similar elements in other industries as well,”

Jaitley sahib it is your call!

 

 

 

GST a game changer for sure

Let us come straight to the point! Why do we say this?

Many countries implemented GST. It is not as if their economies were magically transformed. But then each one does so for their own reasons and have their own unique circumstances.

For Singapore (to take one example), it was the desire to reduce Income taxes and yet retain revenue buoyancy. This was a key USP when it competes with the likes of Hong Kong where taxes are lower. Prior to that, Singapore had no taxes on sale at all, barring sin goods.

For India, the key benefit is reducing tax evasion and bringing almost all economic activity into the tax net. Perhaps no other country implemented GST with an economy like ours where most activity is outside of the tax net.

This is why it is going to be a game changer. Nothing else (imperfect rates, complexity, too many forms, returns blah blah blah) matters. Just this one factor alone will more than justify these compromises and sub optimal choices and bargains to get the thing going.

Right now most small traders don’t pay any tax. Nor do they issue any receipt. This means their entire income is “black”.  This evasion cascades up and down the supply chain – the trucker who delivers the items, the landlord who collects rent, the wholesaler who sells to the trader and so on, all get paid in “black” and in turn pay others in black. You get the drift..

In other words, for each tax evader enjoying himself, another “idiot” pays the price. In fact many have to pick up the tab. This is the exact feeling of many in salaried class who are forced to pay tax on their actual income while the trader or contractor next door pays zilch and openly flaunts his wealth.

If this changes (yes, it will not change overnight) that’s a HUGE gain for India. We may not need 28% or even 18% rates for most items.

It will also make the traders and other businesses confident and bold because they don’t have to pay bribes through their nose on daily basis and live in fear of raids and harassment. Check my books – they are clean! They can invest, expand, hire more staff and kick start the economic engine held down by bad loans and UPA’s loot. It also levels the playing field so formal retailing can expand and bring benefits (better paid staff, better quality control, cash free payments, the list is endless).  Salaried class can look forward to lesser direct taxes.

In fact even on Day 1  many have proudly posted their GST paid receipts on Twitter – showing tax collected and paid by vendors who never did so earlier! Here’s a sample

In fact the doomsday prophets are having a tough time because even dhabhas, shop keepers and supposedly illiterate vendors are issuing GST invoices, right from midnight on 1st July! A few that are used to old ways are going on strike in their usual ways, but this is one tsunami that is not going to roll back for them.

We are on to something HUGE. The benefits are clearly under-estimated.  Don’t get us wrong. Modi and his government may mishandle the implementation and may even pay a price in 2019. We frankly don’t care. That is besides the point. But it will settle down one day and improve with time.

Looking at Indian economy as a whole this will be the day that will be celebrated by our children and their children as the day India changed.

You heard it here first!

Comments are welcome.

 

 

 

GST pains and gains

As the GST bill gets closer to its passage in the RS (where BJP is in minority), focus is shifting the the economic spin offs and benefits. One major industrialist called it a ‘brahmastra’ (a celestial weapon from Hindu mythology) for the Indian economy. Perhaps he overlooked the fact that brahmastra was used for destroying, not improving lives!

Be that as it may, there are also concerns that GST may give more pain than gain in the short term, even medium term. Examples of Malaysia are being cited where inflation shot up by 2.5% for a couple of years. Media reports are even saying this would benefit the Congress in 2019. Given the chaos, screw ups, poor planning and execution that features in almost every project run by Indian babus, it is entirely possible that positive effects of GST will be pushed back even further while teething issues are sorted out. And electorates are famous for their unforgiving focus on the here and now.

This is where the NDA government and PM Narendra Modi face a huge dilemma. It’s a big test of their leadership and courage. Should they implement GST ASAP and “pay” the ultimate price in 2019? Or just hope that things will work out by some miracle? Or perhaps do some creative thinking and plan ahead?

GST1

Learn from others, think ahead

It is safe for Arun Jaitley & co to assume that the first few years will be chaotic. It is also perfectly safe to assume that any inflation, even regular one or those caused by monsoons, dollar rate, oil price or whatever will get assigned to the GST by the hostile media and naturally the opposition. Perceptions do matter in politics and all is fair in war and love.

But all is not lost. There is a great opportunity for Narendra Modi to kill several birds with one stone. He was lampooned in Bihar recently for ’empty’ Jan Dhan bank accounts. He has been facing criticism for not being “bold” enough on reforms.  He does not even have to invent any innovative solution! Singapore has been there, done it and there is no harm copying good things!

Singapore implemented GST in 1994 and it did something very clever – it simply gave cash to each citizen with “GST credit” that compensated for extra cost incurred by lower income families, since GST is by nature regressive. This was carefully targeted and benefits were maximum for lowest income families.

GST credit subsidy direct to Jan Dhan Bank accounts

The suggestion is simple. Crores of Jan Dhan bank accounts have been opened. Modi should simply announce that for first 3 years, Central Government will credit an amount into each beneficiary account that roughly compensates for any additional inflation caused by GST. Instantly he can transform crores of ‘aam aadmi’ that knows nothing about fiscal, taxation policy or GST, cares only for his family and its finances, into grateful supporters of an idea that benefits the economy in the long run.

This need not be a huge fiscal burden. Let us do some back-of-envelope maths. The poor and middle class spend, say, Rs. 5,000 per month on essentials. That’s Rs.60,000 per year. 5% of that should more than compensate any GST impact. That’s Rs.3000 per family. If there are 10 crore families (not individuals) that need help, that’s Rs. 30,000 crores. This is a very liberal estimate since 10 crore families will cover about 40-50% of the population and Rs.5,000 itself is a high number. And yet is peanuts compared to money spent on schemes like MNREGA which didn’t do either the economy or the UPA any good. If needed, funds can be diverted from such wasteful schemes to this subsidy.

The biggest problem of the Indian economy, has been that Prime Ministers and ruling parties have rarely made an effort to sell the benefits of reforms to the common man on the street. Most reforms have been by fiat and stealth. This also means that they cannot even openly take credit for doing a good job on reforms.

Today we have a PM who can communicate well and is certainly not tongue tied. Why not go to town with GST and the subsidy to sell painful but necessary reforms in general to the general public? He may find that the poor voter is clever enough to understand if only it is presented to him in a proper way. And he is not ideologically closed minded or biased, something you can’t say of our TV studio liberal elites.