New dawn at midnight

New dawn at midnight

GST is certainly an economic landmark, but it's also a work in progress.
While not as momentous (महत्वपूर्ण) as midnight in August 1947, the advent of the Goods and Services Tax regime is certainly a landmark in the economic history of India. The GST that has arrived today is less-than-perfect but has been the outcome of a herculean (अत्यंत कठिन) political exercise, of fervent (उत्कट/ तीक्ष्ण) negotiation, of a compromise reached between the Union government and 29 states and seven Union territories ¬ together making up 37 different tax administrations ¬ and is the result of an idea and an endeavour (प्रयास) that began with this century.
True, there will be initial hiccups (हिचकिचाहट) and genuine compliance confusion. Yet, fairly soon, the positive impact of GST should be available. Many of India's strategic objectives, including the creation of a more robust manufacturing economy, cannot be realised without an effective GST-type regime and a transparent and digitally verifiable tax continuum.
Pre-GST, it was possible for importers, traders and retailers, at various points in the transaction chain, to buy goods abroad (in Bangkok or Guangdong for instance), declare fewer quantities than imported and sell without receipts. There was tax avoidance at several stages. In contrast the Indian manufacturer for the same product category was penalised because its production was recorded accurately at the factory, and there could be no “hidden production” that was sold under the table.
Not all of this will go away with GST. The human mind is ingenious (प्रवीण) and will find methods to challenge the best tax regime and the most vigilant tax officer. Yet, the disincentive for tax avoidance will heighten. With every transaction down the line claiming tax credits on the basis of previous transactions, playing games with legitimate tax dues will be that much more difficult. In the end, GST is a strategic necessity. To take a random example, if domestically manufactured mobile phones are to compete with a flood of Chinese imports, then they will find it easier to do so under a GST umbrella.
As such, if the Narendra Modi government and if Prime Minister Modi and finance minister Arun Jaitley are taking credit for the political achievement of GST, and for attaining that grand bargain that led to, first, the constitutional amendment that permitted a GST ¬ and the right of state governments to tax services ¬ and second, the agreement on specific rates, they are entitled (हकदार) to do so.
The opposition, specifically Congress and Trinamool Congress, contributed to that grand bargain. They are being churlish (अक्खड़) in rejecting this accomplishment. Not participating in the GST inaugural function is, really, a needless protest.
To be sure, this is not an optimal GST. There are five rates, which in time should be consolidated to perhaps three ¬ the dream of a single rate being somewhat impractical in the Indian context. More so, differential rates under the same product category ¬ cinema tickets below and above Rs 100 ¬ are ideally avoidable. This too will hopefully be sorted out in the medium term.
The fine-tuning of the GST regime ¬ now that the constitutional amendment has been done and GST has been introduced ¬ is going to be a continuous process, as India adjusts to a new system, as the economy grows and as needs change. Nevertheless, for a start, the move from source-based taxation ¬ tax where the goods are manufactured or service provided ¬ to destination-based taxation ¬ tax where the end-consumer sits ¬ is for the better. The GST regime will be looked after by a dual administration ¬ the Centre and the states. This will require delicate relationship management, especially as there will be attempts at jurisdiction shopping. It will also mean that state governments will have to seriously revamp and upgrade their tax offices. For example, the tax infrastructure in a manufacturing state such as Tamil Nadu or Gujarat has historically seen greater investment than that in, say, a UP or a Bihar which are not manufacturing states. Under GST, thanks to large consumer populations, Bihar and UP will become significant tax collectors and recipients. Governments will have to respond appropriately.
This capacity upgrade can prove a tonic. One day, under a GST 2.0, one can envisage GST collection falling entirely in the domain of state governments, in a federalised economy, with real-time monitoring of data and tax collection making for a seamless (निर्बाध) transfer from states to the Union government, rather than the other way round. New Delhi could then be responsible for policy issues and GST Council matters, leaving actual collection to states. That should be an aspiration for an India of the 2030s, a $10 trillion economy that is not very far off.
Somewhat related to this is a typical Indian piquancy (उत्तेजकता) concerning the dual administration. State government GST offices will be headed by Indian Administrative Service (IAS) officers, the old sales tax commissioners. The Union government GST offices will be manned by Indian Revenue Service (IRS) officers. The approach, outlook and specialisation of the two are inevitably (अनिवार्य रूप से) different.
One solution is to make the IRS an all India service and post IRS officers under state governments as well, to run the GST offices down the line, in and for the states, as a single administration. A precedent (पूर्व उदाहरण) occurred in 1966, when forest issues where placed in the Concurrent List of the Constitution and the Indian Forest Service was created as an all-India service. Perhaps such solutions will be part of the radical shake-up in the bureaucracy that is overdue. With luck, the conversation around GST will hasten that.