With GST, ‘make in India’ may soon become ‘make in China’
The Modi regime is once again trying to do what it did with demonetisation: It turned a straightforward money exchange scheme into a huge economic holeanalysis Updated: Jul 06, 2017 20:57 IST
“The rollout of the goods and services tax (GST) on 1 July will, in a single stroke, convert India into a unified, continent-sized market of 1.3 billion people,” Prime Minister Narendra Modi wrote in an op-ed for the Wall Street Journal in the last week of June. Speaking about it, he deemed it as the most significant reform after the scrapping of the Industrial Licensing Act of 1951 in 1991. But it is hardly so. The essence of a true reform is to unfetter the process, whether it is setting up or running an enterprise or getting a passport. This the GST rollout, as it is now, doesn’t.
But it is a bold move that has been in the making for 17 years. It overcame many obstructions (most notably by the then Gujarat CM, Narendra Modi) but also got transformed from a simple two-tier taxation structure into a somewhat unwieldy policy with half a dozen levels. Instead of reducing record keeping and paper work (even if it is entered by computer and internet). However, it holds the promise of vastly reducing leakages from what had become an extremely corrupt and clumsy system. Essentially, the world’s third largest economy (by PPP) is to transform itself by removing internal tariff barriers and collapsing 17 central, state and local body taxes into a single GST. This should, hopefully, hugely add to government revenues and provide it with much needed funds to invest in building and rebuilding infrastructure, stimulate demand and production, and most of all create the tens of millions of jobs to keep millions of hearths and hopes lit.
Corporate and consumer expectations of the tax reform, which some economists say could add between 1 and 2 percentage points to India’s annual growth rate, are high.
Revenue losses will be all but over. But there is another kind of revenue loss we need to be worried about. Tax evasion is India’s biggest business. The earlier web of excise, customs and sales taxes created a system where huge revenues were foregone by the state, and huge revenues accrued to the tax officials at the Centre and in the states. They will do everything in their power to make the simplified system even more complicated. Unfortunately the unambiguity of the language required in the regulations framed is missing. There is still much scope for bureaucratic interpretation and discretion.
There are other glaring inequities. I will just cite one. The sports goods industry, which is mostly located in Jalandhar and Meerut directly, employs about half a million persons. The sports goods market in India is valued at US$ 3.6 billion. The market is growing as 35-40 % a year. The growth is expected on account of increasing awareness about health and fitness in the country. India also exported sports goods worth around US$ 400 million as compared to US$ 214.95 million in 2012-13. The major items to be exported during 2013-14 include inflatable balls, cricket bats, general exercise equipments, sports nets and protective equipment for cricket.
Now consider this. All the sports bodies and their members like players and coaches can directly import sports goods without attracting any customs duty. But Indian-made sports goods will entail payment of a GST of 18%. This will effectively remove any competitive advantage they may have. Take the case of table tennis tables made in India. The GST Council’s notification based on its June 19 meeting indicates that under its notification 146/94 government bodies, sports federations or specified sportspersons can import them (mostly from China) without attracting any import duty or IGST. But if the same set of buyers were to buy them from local manufacturers it will entail a GST of 28%. Similarly sporting goods like cricket gear, hockey sticks and soccer balls will become cheaper than Indian manufactures. Make in India will soon become make in China, or Pakistan or wherever, but not here. Is this what Arun Jaitley wants?
Sachin Tendulkar’s son will be able to import his cricket kit from England, while a middle or lower class kid from Saharanpur or Ranchi will pay more for Indian kits. Is this the new equity? It’s bad enough that luxury cars will attract lower GST and be cheaper while the converse is true for mid range and small cars. Even worse, environmentally friendly hybrid cars will cost even more. This is clearly indicative of the lack of preparation.
Taxpayers are already complaining about the sheer volume of additional record keeping and number of forms to fill. If these were essential than arrangements should have been made to train and prepare. Such a gigantic reform roll-out requires a huge preparation. The Modi regime is once again trying to do what it did with demonetisation where it turned a straightforward money exchange scheme into a huge economic hole. Once again we are seeing patently inadequate policy implementation, with all stake holders being brought aboard on the new steps, there will be a surfeit of confusion that will slowdown economic recovery. Once again the Modi government seems more intent on political gains for itself than economic gains for the country.
Mohan Guruswamy is an economic and policy analyst
The views expressed are personal