Indians respond better to light touch than to whip

Official records reveal an impressive number of meetings between the mandarins designing the Goods & Services Tax (GST) and businesspersons since 2015. The outcome? A tax in the Maximum Government mould. No surprise, as most businesspersons in India go into the “echo chamber” mode while interacting in public with high officials, repeating only what they are sure would be palatable to their elevated audience. Just as the confidential assessments of IAS officers range only from “Good” to “Very Good” to “Excellent”, so did the comments of trade and industry associations on the labour of the officials who finalised the operational details of GST. Miraculously, during the period when the election campaign for the Gujarat Assembly was boiling over, a semblance of common sense took hold within the dovecotes of North Block and few ultra-high rates were pared downwards. Overall though, GST was left much as it was during the 30 June 2017 Midnight Launch, a grab-bag of multiple GSTs (State, Central and Integrated) with a complex array of rates, most of which seem to have been set randomly. To those who call for a single GST with a single (low) rate, the reply is that such steps will get taken only “after tax collection improves as a consequence of better compliance”. Our mandarins and the politicians reposing blind trust in them seem unaware that the only path to full compliance and, therefore higher collections, is through low tax rates and ease of compliance.

Colonial-era mindsets, and these include even those unfamiliar with the English language, abhor transparency, mistrust the citizen and prescribe enhanced state control as the antidote for all ills. Given the way in which GST has been structured, it is no surprise that tax collections have been sluggish and indeed slipping since what passes in the Lutyens Zone for GST was introduced. Prepare for the standard North Block response, which is more scrutiny of returns and still more prosecutions of those struggling to comprehend and to comply with a dysfunctional tax. Such a reflex makes doing business even more unattractive in India than before for those unlucky enough not to have overseas accounts or foreign connections. Many small businesspersons are dropping out of the GST system, as evidenced by the fact that nearly 1.25 lakh dealers (of the 17.6 lakh dealers registered under the composition scheme whereby returns get filed every quarter) have opted out. A single low rate and simplified compliance would have, in contrast, exponentially boosted the number of those entering the system.

How much longer do we have to wait before civil society gets suitably represented within the policy echelons of government? While South Block (where the Prime Minister’s Office, the Ministry of Defence and the Ministry of External Affairs are located) has to some degree changed its style and direction from the path followed by the Manmohan Singh government, North Block (housing the Home and Finance Ministries) seems not to have noticed that a new dispensation took charge on 26 May 2014. The Home Ministry watched with the passivity of a statue while businesspersons looted banks before making good their escape to foreign shores. The proposed legislation against such individuals will only motivate those left behind to grab as much as they can and scoot before their scams get revealed on television screens and thereby force officials to take (mostly cosmetic) steps against them. The UPA’s drastic anti-rape laws did nothing to prevent such molestation, and nor will the new NDA edicts have much effect. As for the Finance Ministry, the mandarins running the show keep repeating the mantra that “lower rates will come after collections shoot up”, which means never, as only lower rates and ease of compliance can ensure the exponential growth in coverage and revenue that the exchequer needs. Despite the NDA putting in place tax enforcement measures that are even harsher than those initiated by P. Chidambaram during the UPA period, as well as subjecting the people to systemic shocks such as demonetisation of 86% of the country’s currency at four hours’ notice, increases in both the tax base as well as revenue collections have been modest relative to potential. And as for black money here and abroad recovered, this is in inverse proportion to the number of sittings of the SIT on black money announced with a flourish of verbal trumpets in May 2014. The medicine recommended within the Lutyens Zone to improve numbers? Naturally, still harsher penalties and more intrusive inspections, together with the levy of cess upon cess. India’s vicious circle of perpetuation of poverty through dysfunctional policy seems never to go away.

But there is still scope for another Union Budget before the 2019 Lok Sabha polls. Prime Minister Narendra Modi will need to ensure that a budget gets passed that is suited to the temperament and needs of the 1.26 billion individuals that invoked time and again in his speeches. The people of India, who have endured a millennium and more of cruel servitude, have become expert at deflecting efforts at whipping them into submission. However, they respond admirably to fair treatment, which is what the government should give them. As an example, the exemption limit for payment of income tax should be Rs 6 lakh a year, while the tax thresholds for higher levels of income should similarly be doubled. As for GST, there could be a single GST of 15%, which gets reduced to 12% and finally to 10% in a few years’ time, once the economy stabilises at double-digits in annual growth, the way China did in the 1980s and beyond. Those units with an annual turnover below Rs 5 crore should be exempt from GST, while reporting procedures should be drastically simplified for the rest. The generation of income, employment and spending (especially on items and services domestically produced) should be encouraged. Indians respond magnificently to a light touch, while being skittish and prone to under-performance when subjected to the whip, as is shown by productivity per capita of our ethnic cousins in the US when compared to that in India.