If the action in the Indian taxation game were reported as passionately as our sports journalists report on IPL cricket, there would be a bonanza to be made in media ad revenues and subscriptions. Instead, bored reporters dutifully report meetings of state and central government officials to discuss arcane things like "GST" and "Service Tax". The reader of a newspaper or website barely glances at these news items, except when an enterprising minister or trade association manages to attach a "reform" badge to what they are pursuing. Thus a call for "GST reform" has a virtuousness to it that makes the minister or official making the call sound like a visionary. What often is the reality is that these "Tax Games", if I can call it that, are as naked a pursuit of wealth and social standing as an IPL cricket match is - and can be as entertaining if we can only get our top journalists to pay attention to it. The Tax Games have participants who are the equivalent of the Mumbai Indians, the Rajasthan Royals and the Chennai Super Kings.
To explain the Tax Games to the ordinary citizen is like trying to explain cricket to an American or Japanese friend. Let me start by explaining that every game has a set of rules (you can't kick a ball in cricket and you only kick and not touch a ball in football). In a similar fashion, the Tax Games have their rules as well. One of the basic rules of the Tax Games was that the Centre would tax manufacturing and the states would tax retail sales. This did not matter much when the same political party, the Congress (following the cricket tradition of giving imaginative names to teams, let me call the Congress, "The North Indian Landlords") played at both the national and the state level. Soon they found out that manufacturing was such a small and low-growth sector in India that making a living by taxing manufacturing would get them nowhere. In addition, they also realised that the value added in manufacturing was small compared to the value added in the sales and after sales activity of the product. So, they took the first step in capturing some of the action in sales activity by introducing a central sales tax.
Meanwhile, as the 1960s dawned, more teams entered the game. What was only the North Indian Landlords now had other teams: The Gujarat Landlords, the Madhya Pradesh Princes, The Bengal Gentlemen, to name a few (for an in-depth look at what social forces worked over time to create these, have a look at Parties and Party Politics in India, edited by Zoya Hasan). And each of these teams attempted to lure manufacturing activity to their state by promising to charge a lower (or in many cases no) sales tax or in some cases land forcibly acquired from farmers at rock-bottom prices. This quickly drove down sales tax revenues for states. And whatever little remained had to be split with the Centre as many (most) goods had a central sales tax and a state sales tax.
The tax bureaucrats looked around in desperation and discovered that the real action in the Indian economy was in services and not manufacturing. And the revenue from a manufactured object (for example, air-conditioners) could be less from outright sales of these objects than from services such as the leasing out these objects. So, the Centre started taxing services.
But they soon realised that what seemed a nice clear-cut division between "services" and "goods" started to blur. Today, goods, services, and other types of supplies are packaged as composite bundles (to continue our air-conditioner example: air-conditioners on lease with three years maintenance free thrown in) and offered for sale to consumers through a bewildering assortment of wholesalers, retailers and others, so that it was no longer clear what part of the invoice was for a "good" and what part for a "service" and thus who had the power to collect a tax on it, the central government or the state government. And to make matters more complicated, it was no longer The North Indian Landlords management sitting down and settling matters with their state-level versions; virtually every state has its own team and in many states multiple teams. Most of all, teams such as the North Indian Wholesalers or the Western Indian Traders emerged as the points of collection and thus had strong views about the hows and how-nots of tax collection. Some states, out of desperation for revenues and not being able to persuade the party in power in Delhi to help them with revenue grants, started stopping goods entering their borders and charging a tax. This meant that goods that should have taken two to three days to go from a manufacturing point (or importing point) to the end consumer would end up taking two to three weeks lying at state border check-posts. This has started off the next round of Tax Games, the GST Reforms Game. When implemented, in one fell sweep it will replace central exercise, service tax (charged by the central government) and VAT, sales tax, entertainment tax and luxury tax (levied by state governments). GST will be levied on and paid at the point of consumption and not at the point of manufacture.
How does this change the nature of the game? States where manufacturing is concentrated will see their tax revenue re-allocated to states which are mostly consumption oriented. This could also mean that chief ministers will no longer be as enthused about promoting manufacturing - the tax revenues from all the effort of luring manufacturers to set up plants, train farm workers to become lathe operators and so on will go to the state that has consumers for these products.
What will happen is that incomes of the small traders who make up more than half of our economy and who employ most of the young people coming into the job market every year will be mopped up and used to finance pay and retirement benefits of the white collar middle-class government employees. And the effort of mandatorily registering and collecting tax collection across an enormously larger number of small traders will be a bonanza for the bit players in this vast tax stadium: the millions of state and central tax department employees, tax advisers and consultants who augment their income by first levying taxes, sometimes indiscriminately, and then withdrawing or reducing the taxes charged for a share of the proceeds.
Ajit Balakrishnan, the founder and CEO of Rediff. com, is the author of The Wave Rider, A Chronicle of the Information Age
ajitb@rediffmail.com
ajitb@rediffmail.com
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