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ONE NATION, ONE MARKET, ONE TAX

Two factors will lead to a delighted customer in 2030. The nudge-network effect will push Indians to be tax-compliant. Technology will harness business efficiency, leading to price falls.

On Doctors’ Day 2017, our parliamentarians administered the first big wave of chemotherapy to rid the Indian ecosystem of tax non-compliance. The Goods and Services Tax (GST), the desi version of the globally renowned Value Added Tax (VAT), was the country’s biggest and boldest tax reform since independence. But nine months on, in March 2018, the signs of trouble are ringing loud and clear. There are both transactional and policy-related issues that we cannot wish away.

PANGS OF THE PRESENT

For starters, the IT infrastructure has turned to be inadequate. The queue to get in is long; there is no automatic matching of purchase and sale; the user has to weave around a software that is not user-friendly. For a nation that seamlessly computerised the Indian Railways over 30 years ago, this has been a tad sad. Crashes galore in the GST software make people wonder how Facebook and Google, which cater to significantly larger numbers, are never ‘down.’ Next up on the pang list, Small and Medium Enterprises (SME) that are the bulwark of the economy, do not have the expertise to use this technology, pushing them into the arms of professionals for help and thus increasing the cost of compliance. Finally, refunds for exporters are taking way too long .
There are policy-related issues as well.
One, at seven and counting, there is a multiplicity of tax rates. This multiplicity has a scent of socialism to it, although India married market economy way back in 1991. Ideally, whether you buy a pin or a Mercedes-Benz, the tax rate should be the same: lest some innovative lawyer end up redefining a Benz as a string of pins! The multiplicity is throwing up pain-points on classification. Two, petrol products and alcohol, the most prominent money-spinners, are outside the ambit of GST. Real Estate and construction, where the bulk of black money in India sits, are not part of the GST dragnet. Ditto for agriculture. Three, there are already hundreds of amendments and modifications in these nine months. So, the tax regime isn’t stable, thus violating Adam Smith’s tax canon of certainty.
So, is GST fair? Or will the ruckus be short-lived? Will we see the Promised Land? But first, the big picture.

WHERE WILL INDIA BE IN 2030

India’s GDP in 2016 stood at 2.3 trillion USD (Source: World Bank). Considering the opportunities and constraints that will be caused by global economic cycles, a growth of 7.2 per cent per annum is a safe bet. Propelled by this growth India will be a $6 trillion economy by 2030 at constant prices, with the exchange rates unchanged. The current population of our country is 135 crore, based on the latest UN estimates. This population is growing at 1.2 per cent per annum and should touch 156 crore by 2030. So the per capita GDP would have doubled, improving our standard of living significantly.

BIG DATA MAGIC

The Economic Survey 2017-18 throws in interesting insights on GST.
To start with, it estimates a 50 per cent jump in the number of indirect taxpayers. Secondly, earlier the producer-states were apprehensive that their revenues would dip because of making the tax consumption-based. This apprehension has turned out
to be unfounded, as the GST base seems closely linked to the size of the state’s economy. Also, many of the government’s estimates appear to have been under-stated. Like, India’s formal sector is substantially bigger than currently believed. It was more than 30 per cent when defined in terms of social security provision, and more than 50 per cent when defined in terms of being in the GST net.

Elicits Voluntary Compliance!

Perhaps, the most intriguing piece is that GST is eliciting voluntary compliance! A good 1.7 million small enterprises not obliged to register have voluntarily registered. They transact with large enterprises and avail input tax credit. Another 1.9 million registrants, sized between Rs.20 lakhs and Rs.1 crore, who could have opted out due to the Composition Scheme (where tax payers pay a small tax based on their turnover and are not eligible for input tax credit), have chosen to file under regular GST. Effectively, more than half of the taxpayers eligible for the composition scheme are willing to give it up and be regular filers. These ostensibly random, unrelated observations, when taken together signal the shape of things to come.

WHAT IN 2030

Regardless of who forms the government in 2019 and 2024, GST will stay on the statute, get rationalised and become a super-efficient tax-gathering machine. It will meet Adam Smith’s canon of tax-convenience. The time and manner of payment will become convenient for the taxpayer as leaks and lags will be sorted out. We foresee apps that will help every business do its complete accounting and help file GST returns at the tap of a button.

Just two rates?

The real benefit of GST lies in supply chain dynamics. Businesses would discover that having multiple depots across the country will not help, as the stock transfer exemption distortions will disappear. There are indications that the revenue is rising and the assessment base is widening. If this continues, we could end up with just two rates: 5 per cent and 15 per cent. Alternatively, there could be a single rate of 12 per cent and a few exemptions. The distinction between ‘goods’ and ‘services’ will disappear, as the rates for the two will be the same.
With electric cars becoming a fast approaching reality, petroleum products could enter the GST stream by 2020. Although agriculture is a state subject, it will also gradually move into the ambit of GST. The Constitution is likely to be amended to bring in real estate and electricity within the ambit of GST. The elaborate provisions of GST will be streamlined. The technology platform will stabilise before 2020 and help the government eliminate fraudulent transactions, paving the way for a high level of compliance.
There will be times when the state governments will reject the directions of the Council, and matters will need judicial intervention. As every country expands its scope of reverse-charge mechanism and levy on non-state participants based on the market, the world will face double GST levy on the same transaction. Countries will have to move towards GST Double Taxation Avoidance Agreements similar to the Income Tax DTAA.
Through all this, the consumer stands to gain. The reduction in the rate of tax, the cost controls implemented by companies and efficiencies in the chain will translate into price reduction. The cumulative effect of this will trigger high consumption and India will model itself on the US. A system-based approach, algorithm-driven assessment and elimination of interaction for assessment will reduce opportunities for corruption.
The revenues of the Centre and states will increase dramatically with a transparent system and higher level of compliance. The biggest benefit will be in direct tax collections since data will be available; businesses will obtain a PAN to survive in the GST-world and consequently will report income driving a larger pool of income-tax payers.

‘NUDGE’ AND ‘NETWORK’ EFFECT

We saw data showing that even those who do not have to register are registering on the GST network. This is because larger companies are refusing to do business with non-GST compliant vendors. This is what we call the ‘nudge’ effect. Others are willing to do a regular transaction in the light of input tax credit available, as individuals wish to be honest. As more people join the network, we will have the equivalent of Facebook and Twitter: a community of taxpayers. Their profiles, transactions, movements, matching and tax offsets are now visible. The network disincentives non-members. Every member profits and is empowered by the network.
The new world will be a web of interconnected trade networks. These will create a wealth of data, which when examined through using artificial intelligence, will generate useful patterns. Thanks to Analytics and Artificial Intelligence, we will be able to build total transparency, ensure vigilance, offer potent insights, bring out hidden pains and drive efficiencies, as intermediaries vanish.
The non-formal sector will join the mainstream as staying outside will mean losing out on being part of the Big Circle, unable to exploit opportunities, enforce rights and convey grievances. The policing will happen by the network and the government will have a minimal role to play on this score, as ‘Networks’ distribute power and democratise opportunities. The cliché “A chain is as strong as its weakest link” will no longer be valid. The strength of the weaker link will lie in being connected to the strongest link in the Network.

CONSUMER SURPLUS

We saw that the hitherto tax-cheaters would come into the tax net, courtesy the ‘nudge of the network’ or the ‘networking effect.’ As collections boom, tax rates will drop, leading to consumer surplus. Aadhar will become ubiquitous. Farmers will pay for full electricity and get rebates paid into their bank accounts cutting out the electricity department. Even the foreign tourist will pay GST and then receive a credit on leaving the country. Such changes will lead to a correct reporting of GDP.
As direct tax and indirect tax converge, tax evasion will drop. The incentive for non-compliance comes down as the arbitrage between the direct tax and indirect tax disappears. Fitness trainers, fashion designers, and hair-stylists have begun to issue receipts with GST. Traders are doing so as well. A trader with an annual turnover of Rs. 10 crore saves 10 lakh, ie., 1 per cent. In an industry that generates a 10 per cent margin, this is an increase in profit of 10 per cent. The savings came on account of the elimination of the (erstwhile) cascading effect of the tax. The gap between the formal and informal has thus, disappeared.

FINAL WORD

We are now fast-forwarding ourselves to 2030 to tell you what India will look like that year!
In 2030: we are now a 6 trillion dollar economy. We are tightly networked, highly compliant economy with policing built and enforced by the nudge-and-networking effects. Every work gets reported under GDP. Direct tax rates have fallen to 20 per cent, and GST rates to 15 per cent. Despite hiccups, gaps and transitional pangs, we have managed to usher in growth at an average of 7.2 per cent per annum, which makes us the fastest growing large economy in the world. We have used Aadhar to ensure that the subsidies are reaching the right people, for the right amount, at the right time and avoiding the massive premium of not being compliant. We are now really one nation, one market, and one tax entity.

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