Monday, July 03, 2017

Taxing Decisions

Vasu Reddy from Chicago

India passed the GST (Goods and Services Tax), on the last day of June 2017.  It joins a group of nations that have implemented the same (supposedly select group) simplified and uniform tax code for selling goods and services.  If we look at the geo-political scape of India, GST begins to simplify the massive and multi-teared (sometimes excessive and unfathomable) and facilitate an easier tax collection system.

While BJP government has been able to garner support to implement GST, India had been contemplating streamlining GST for many years.  Modi and his determination on financial reforms is commendable in negotiating and pushing the legislation on GST.  It certainly has political risks, but Modi has demonstrated that he is willing to take them.

GST is only a portion of the tax code.  It certainly covers all good and services sold in the country, and the nation can start to account for every aspect of the transactional economy.  While people might disagree on various rates for different good and services, the uniformity is important and enforceable.  For every product and service there will no longer be challenges of consumption and tax associated.  The government can adopt different tax rates as needed and appropriate, but the accounting is defined irrespective of the tax rate.  In GST, it considers everything sold; goods and services in India.

Implementation of GST in 2017 is the first major overhaul of tax code in independent India (1947).  As the process of simpler tax code comes into effect, India has begun to first streamline and close the loopholes to the production and delivery to everyday needs.  Now that a national GST is in place, administration is manageable and accountable.  For many years leading into adoption of GST, India’s businesses and people have been prepared for the overhaul, and as it shows in the first couple of days after the new GST, it has no public opposition.  The acceptance and implementation in such a diverse economy shows the need for uniform GST and people’s support for reform.

Indian economy is vastly informal.  GST allows for bringing the informal economy into proper accountability.  The Indian consumer just like any other is used to price changes (mostly pricing up) and a variation in tax to shopping cart is not going to be a sticker shock for the buying behavior.  People will buy what they need and if markets price items beyond affordability, the buyer will find alternatives.  There is no need for the government and the public to panic with new tax code.

For the record France was the first nation to adopt GST, while India joins the GST group, nations such as Canada and Brazil have dual GST.  While the European nations and the nations with high per capita income adopt GST, and is a across the board tax for all its people, India has a major disconnect with income and GST suddenly imposes the same tax rate for the very rich to very poor, and everyone in between.  While the tax rationale is addressed, Modi (for a fact any leader) can start to fix the income and opportunities for all the people.

While the public tries to make sense of taxation, almost all the countries on earth are managing their national budgets on deficit.  Borrowed money adds additional burden on budgets, simply adding an interest line.  This line takes away otherwise available resources for nation building and well-being.  In most cases the borrowing is expanded (politicians love to argue about national debt, but always vote favorably to increase the debt ceiling) and each passing year, the debt only increases and interest goes in hand, reducing the resources for public needs.

As individuals (specially the middle class) aspire to be debt free, so should the nations.  It is perhaps in Modi and his political audacity to make India a debt free (zero deficit) budget nation.  India starting (new) in 1947 with Nehru, has continued to expand the GAP between its receipts and spending.  Every leader has promised but never delivered a debt free nation.  Modi has already taken on the decisions on back money, demonetization and now pushing GST, along with his constant search for India First agenda, can push for a nation with balanced budget.  He can even drive a constitutional amendment that can’t be overturned by simple majority on a balanced budget/debt free nation.

If we leave the political agenda aside, a combination of uniform taxation, scam free (minimize the public coffer looting); all of which translate to better tax collection and better handling of public’s money.  Modi has nothing to lose by pushing the nation first agenda.  His party or any party will have to follow the path of public money, public trust and public support.  When public sees that their coffers are appropriated for public needs, their support will be unanimous. What nation would not want to be debt free, tax compliant and scam free?

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