The twin revenge
On 6 October, the goods and services tax (GST) council met and announced some reliefs for small and medium enterprises (SMEs). On 26 September, Scroll.in published an interview with Anil Bhardwaj of the Federation of Indian Micro and Small and Medium Enterprises. In the interview, he mentioned at least four important vexatious issues with GST. One was the insistence on filing GST returns by exempt businesses if there was inter-state sale; the second was the collection of GST on advances received for orders even though the sale of the goods or service might not have been fully consummated; the third was the reverse-charge mechanism; and the fourth was the introduction of the e-way bill system which was supposed to kick in from October.
Now, the GST council has decided to waive registration for small businesses (turnover of up to Rs20 lakh) even if they were doing interstate sale. It has exempted businesses with aggregate turnover of Rs1.5 crore from the requirement to pay GST on advances. Third, the reverse-charge mechanism—buying from a non-GST compliant entity means that the buyer prepares his invoice, pays the tax and then files yet another document to claim it back—has been kept in abeyance until the end of March. The e-way bill will be introduced in a staggered manner and will be rolled out nationwide only from the next financial year. On top of that, the thresholds under the composition schemes have been raised slightly.
While the GST council deserves praise for being responsive to emerging issues, the mistakes made in the initial GST design could have been avoided because they arose not out of inevitable complexity but out of a risk-averse and puritanical bent of mind.
On 9 November 2016, I wrote on my blog: “Short-term liquidity squeeze could be severe and hence economic activity could suffer. Further, with the eventual design of the GST looking more complicated than originally envisaged and with the timelines getting shorter, uncertainty could be compounded. That risk is non-trivial. That is why GST should have been more concerned with simplicity, ease of use and implementation rather than revenue considerations. Bold thinking was always needed and more so, in the light of this announcement.”
Global growth has been a problem. Corporations had gorged on debt and are deleveraging. Upper House majority was elusive. Politics had become so divisive that there was no middle ground in areas such as diluting the application if not the intent of the land acquisition laws. Courts were interfering in executive domain. So, economic slowdown had been in motion before demonetisation and before GST happened.
Paradoxically, in such situations, it becomes all the more imperative for the government to spot the windows—no matter how small—for bold policy action and use them. That is policy entrepreneurship and it involves risk-taking both in the policy and political domains. For example, keeping the GST design simple with fewer and lower rates might have entailed the risk of the Union government having to meet the revenue shortfall but that would also be a bet on the economic activity being revived with a simple design. Leadership is about taking such calculated risks. Sure, luck is involved. But, when and where is it not required?
Let us take the exemption given to businesses on paying GST on advance received for an order. That exemption is limited to Rs1.5 crore. It is 15 followed by six zeroes. India’s gross domestic product is 150 followed by 12 zeroes. Two issues here. Is it correct to collect GST on a sale that has not been completed and two, if that is correct, should the threshold not be higher? What is holding the council back? How much of the caution is due to the obsession with “revenue neutrality” demands of the states? Ultimately, all revenue—neutral or biased—arises out of economic activity. That is the basic fiscal policy lesson.
While demonetisation has been the revenge of the moral police, GST is a twin revenge—the revenge of the moral police and the revenge of the bean counter. Indira Rajaraman’s article in this newspaper is a classic, for it shows how the attitude of distrust (reinforced by the pursuit of revenue neutrality) as opposed to “trust but verify” (random checks) has led to the insistence on voucher matching and monthly reporting. The same mindset led to the bad design of and the consequent underwhelming response for tax amnesty schemes. These revenges have already taken a toll on economic activity and threaten to cause further damage because, to ameliorate the harm they have caused, the government could insist on pressing too many panic buttons—lower interest rates, currency depreciation and fiscal stimulus. Compounding policy errors would compound economic uncertainty.
Successful policymaking is as much about entrepreneurship and risk-taking as commercial businesses are. Crucially, it is also about finding the right balance between enabling and policing. At the risk of redundancy, I shall repeat that economic policymaking is about striking the right balance, maintaining order and facilitating activity. This government is captured by the mindset that focuses disproportionately on the former. If these two lessons were learnt, the economic slowdown—by the way, 5.7% growth rate is no shame in today’s world—will have been worth it.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com.
Read Anantha’s Mint columns at www.livemint.com/baretalk. Comments are welcome at email@example.com.