Gst will work where demonetization won’t
Finance minister Arun Jaitley was spot on when he said, while handing over the Economic Times Awards for Corporate Excellence to the winners of 2016, that changing the mindset that it was smart to not pay one’s taxes is a major challenge before the country. He said demonetization was meant to address the problem. It might well have been meant to, but will fail in this task, given the alacrity with which Indians have deposited the bulk of the demonetised notes already and given the ease with which old money can be changed for new legal tender in the informal market. However, one other reform that the FM is pursuing with tenacity, the Goods and Services Tax, is likely to play a significant role in making Indians taxcompliant.
GST allows those who pay tax on their supply of goods or services to net out the tax they have paid on their inputs. In order to claim input tax credit, producers would want to procure their inputs only from suppliers who raise an invoice and levy tax. These suppliers, in turn, would procure their inputs from other suppliers who also pay tax on their output. Once everyone collects tax from those who purchase their supplies, the volume of production that goes outside the tax net would fall appreciably. Once most output gets reported, so would the associated income. Thus, transiting to GST is a reform that would expand the base of both direct and indirect taxes. However, for this potential to be realised, the government must do two other things as well. One is to subsume stamp duty under GST, treating registration as a service rendered for a fee on which service tax is charged. Commercial establishments would then report their true value, so as to maximise the input tax credit by way of tax paid on registration fees. This would benchmark real estate transactions in general.
Another key reform needed is to lower tax rates and raise the income threshold to pay appreciable levels of tax. If the cost of compliance is significantly larger than the cost of non-compliance, people will find ways to evade tax.
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