Rebooting India: Realizing a Billion Aspirations (17 page)

While the new system was an excellent start, it didn’t address all of the many problems bedevilling India’s tax regime. First, VAT operates only at the state level, which leaves untouched the problem of tax fragmentation between the centre and the state—the centre taxing goods at the point of manufacture, and the state taxing them at the point of sale. Moreover, this tax doesn’t apply to services, which are taxed by the centre in the shape of service tax. There’s still an unruly thicket of taxes to be navigated—the octroi system, central- and state-level taxes, entry tax, stamp duties, telecom licence fees, turnover taxes, taxes on electricity, taxes on goods and passenger transport, state-level cesses and more.

It’s not that tax rates in India are particularly high—data from the World Bank pegged India’s tax collection (as a percentage of GDP) at 10.8 per cent in 2012, compared to 10.2 per cent for the United States, and nearly 25 per cent for the UK and France.
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The problem is that there are too many different types and rates of tax. Operating across various levels of government, such a multilayered taxation system leaves plenty of room for grey areas to arise. These uncertainties have to be resolved by the tax authorities, and as with any complex system that relies upon human judgement, a uniform implementation of the law is virtually impossible. Arbitrating tax disputes is also a waste of precious time and resources. It becomes harder to enforce compliance
with the law, and a large bureaucratic machinery has sprung up to police taxpayers.

High taxes on import, as well as excise and other taxes on domestically produced goods, result in a lopsided structure of production, consumption and export. The fl awed priorities that are the offshoot of our current tax system drive firms to lobby for favourable modifications in the tax schedule, making tax policies even more market-unfriendly. As a result, the pricing of goods is not an accurate reflection of the prevailing market forces, a worrying factor in a country where consumers are known to be remarkably sensitive to small fluctuations in price. The ultimate goal of tax reforms is to empower consumers to make rational choices which are based upon their own needs and preferences, rather than being the end-product of policy decisions taken by the ministry of finance.

Given these long-standing issues, the idea of a Goods and Services Tax (GST)—a single, indirect tax system encompassing both goods and services—has been doing the rounds from as far back as 2000, when Atal Bihari Vajpayee’s government was in office. A task force report from 2003 laid down the original design ideas underlying the GST.
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GST replaces the state-wise VAT, central sales tax, service tax and a constellation of other local taxes with a common taxation framework. Under this regime, there is no differentiation between taxation of goods and services.

The GST’s design philosophy incorporates several other principles designed to, as Bharat Goenka puts it, ‘create a system that solves the government’s problems as well as the citizen’s—the only way you can both create a law and ensure adherence to that law.’ Apart from streamlining our tax system, the GST also possesses a second, critical attribute—it applies to goods at their point of sale, not at the point where they are produced, making it a ‘destination-based tax’. In practical terms, this removes any incentive for states to offer manufacturing sops. Instead, they must focus on creating the kind of economic environment that spurs genuine growth and consumption. In a single stroke, this shift will give rise to a system in which economic efficiency drives the choice of location where goods and services are
produced, rather than artificial incentives giving rise to tax havens like Baddi and its ilk.

How do you find out whether a government is serious about implementing a particular reform initiative? In our experience, the answer is to pay close attention to the speeches that its leaders make, whether it’s the Budget speech in Parliament or the Independence Day speech delivered by the prime minister from the ramparts of Delhi’s Red Fort. A mention in one of these key speeches is usually enough to signal seriousness of intent to the offices of the prime minister and finance minister, who then begin to keep track of progress made on these specific promises. While this is no guarantee that things will get done, an official, and highly public, endorsement from the country’s leaders at least gets things moving in the right direction.

And so it was that GST implementation began to move forward with a mention in Finance Minister P. Chidambaram’s Budget speech of 2005–06.
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One big obstacle the GST had to immediately confront was the lack of a legislative framework to support it; if the GST were to become a reality, a constitutional amendment would need to be passed, allowing both central and state governments to concurrently levy taxes on both goods and services, while interstate commerce would be taxed by the centre. Constitutional amendments are difficult by design; both regional and national political support is essential, and while Aadhaar has shown us that consensus can be achieved across party lines, it is usually a long-drawn-out affair, moving in fits and starts.

While political consensus around the idea of the GST was being painstakingly built, the UPA government also decide to create a detailed plan for its implementation, updating the 2003 version. They needed to look no further than the model the previous government had used to drive the VAT reforms in 1999. Finance Minister Yashwant Sinha had created an empowered committee of state finance ministers, chaired by Asim Dasgupta, the finance
minister of West Bengal. This was a move that Nandan described as ‘a masterstroke in reducing dissent’; rather than issuing diktats from on high in the centre, the states themselves were put in charge of VAT implementation, speeding up rollout considerably. The UPA government followed exactly the same strategy for GST, down to appointing Asim Dasgupta as chairperson of the committee. In parallel, Finance Minister Pranab Mukherjee also announced the creation of a Technology Advisory Group for Unique Projects, chaired by Nandan. GST was one of the five key technology projects for which this group was to prepare a detailed blueprint.
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We both attended some meetings of the empowered committee, and got a ringside view into the delicate centre–state manoeuvrings around the design and execution of a new project in government. As head of the committee, Asim Dasgupta, the then finance minister of West Bengal, deftly directed the overall proceedings while taking on board all points of view, from the finance ministers of every state to finance secretaries and revenue officials.

The meetings took place in a conference room furnished with a large square table, and arrayed on every side were about ten finance ministers, beside or behind whom sat their state officials. For every point on the agenda, all state representatives were invited to share their opinion. We found states to be profoundly uncomfortable with the idea of the GST for two main reasons: they feared a loss in their power to levy taxes, and an overall loss in revenue if they moved towards the destination-based tax system that was proposed under the GST, especially for states heavy on manufacturing. For example, the state of Gujarat demanded that they be allowed to levy an additional 1 per cent tax over and above the GST; the state finance minister, Saurabhbhai Patel, said in a 2015 pre-Budget meeting, ‘As we move closer towards the GST regime, finances of manufacturing and net producing states would come under strain, particularly in the initial years, till the cumulative benefits of better compliance can be realized in the form of higher revenues’.
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These and other political bargains are inevitable in the transition to a new system; there was no doubt that the centre would have to guarantee that it would make up for
any shortfalls in state revenue, and offer other incentives to those states which might need a little prodding to fall in line.

Even so, getting states on board and laying out policy guidelines—the tax structure, tariffs, the negative list of goods and services that would not be taxed under the GST, and so on—was not the most time-consuming and difficult part of getting the GST up and running. That distinction goes to the challenge of executing such a complex project across a country as diverse and as large as ours, exactly the same challenges we faced when it came to implementing the Aadhaar programme. Had the government waited until every policy decision was set in stone before moving on to the nitty-gritty of implementation, it would easily have taken years before the GST was ready for rollout.

Adopting the same philosophy of working in parallel that had helped fast-track the Aadhaar programme, Nandan declared to the task force, ‘It will be foolish to wait for the laws to be passed before we begin thinking about implementation strategies. There’s too much to do, and if we don’t start right away, we could be looking at a five-year delay before the GST hits the ground.’ Some of the immediate items on the to-do list were getting every dealer registered under a common nationwide registration scheme and designing the processes for operation and administration of the system. Software standards had to be specified, banks had to be integrated, commonly used tax software had to be upgraded, accountants and tax professionals had to be trained in the new regime, and the public at large had to be educated about the GST system, much like the VAT education melas that Tally had conducted earlier. To this end, Nandan proposed to the empowered committee that a Goods and Services Tax Network (GSTN) be created to do all this legwork in parallel with the legal discussions. The proposal was accepted unanimously, and in the Budget speech of 2012, the finance minister announced the formation of the Goods and Services Tax Network. Having an announcement by the finance minister with a date gave the team working on the creation of the GSTN the right amount of authority and importance to get the job done.

The GSTN is a new institution created specifically to act as the central technology platform that will implement the GST. The structure of the GSTN was articulated in great detail in the report of the Technology Advisory Group on Unique Projects (2011) chaired by Nandan, which drew on collective experiences from the execution of similar such projects in government.

Given that the power to impose and collect taxes is spread across the central and state governments, any attempt to build a centralized technology platform could be seen as a ploy to alter the balance of this power, creating instant opposition. One way to negate such potential dissent was as simple as choosing the appropriate name for the project. GSTN doesn’t exactly make for a catchy acronym, especially for a project that aims to completely transform India’s tax landscape. (In this case, Viral says it is he who is to blame—he wrote the report and ended up picking this name which eventually stuck.) However, there’s more to the name than meets the eye; a neutral term like ‘network’ doesn’t convey a threat, while terms like ‘authority’, ‘India’ or ‘national’ would imply a power shift towards the centre. ‘Network’ helped us convey our goal of the GSTN being only the plumbing that brought together all the stakeholders in the tax ecosystem, with no participation in any centre–state power struggles.

From day one, one of the biggest implementation-level concerns with the GST centred around the actual process of revenue collection. It was not clear to the states whether the centre would collect the revenue, and if the centre would share it with them promptly, or more likely late or never at all. Fund flows from the centre to the state have historically been delayed and intermittent, unable to provide much-needed support when state economies are struggling. It is this history that has led to today’s complex taxation system, and has left our states deeply suspicious of sharing revenue collection powers with the centre. The loss of control over their own revenues was an unattractive proposition, and given that many states have
tight finances, any delay in collections could adversely affect their functioning.

To address these concerns, the GSTN has been designed as a nonprofit company jointly owned by the central and state governments, with professional management. By design, the government is not a majority stakeholder, allowing for the company to hire a professional team. The structure of the GSTN does not disturb the balance of power, and provides much-needed support to both the government and the people; revenue collection departments will find their work simplified through professional technology services, and people will avail of a customer-friendly set-up that transforms the adversarial relationship between the taxpayer and the authorities. It also grants a great deal of flexibility, allowing the organization to invest in choosing the right people for the task of building a complex, highly scalable technology platform. The creation of an institution such as the GSTN also solves another thorny issue—that of the taxation of interstate commerce. A common and neutral body that is jointly controlled by all stakeholders can settle interstate tax claims in a well-defined, timely and taxpayer-friendly manner.

While these decisions gave a sound footing to the fl edgling institution, it wouldn’t be government without its fair share of petty bureaucratic squabbles. Nandan strongly recommended that the chairman be drawn from the government, while the CEO be a professional from the private sector; he wryly recalls, ‘One of the most heated discussions around implementing such a landmark reform was whether the heads of the organization ought to be from the Indian Administrative Service or the Indian Revenue Service.’

Bharat Goenka narrates a story that makes clear the value of simple, easy-to-use technology platforms. ‘Recently, the state of Karnataka launched a new annexure in their tax forms which required businessmen to provide invoice details. At the same time, they had a chat with us
asking if this annexure could be uploaded from within Tally instead of the taxpayer having to do it manually. We agreed and launched the service in July 2014. In the first one month, the government expected no more than 3000 returns to be filed, thinking that people would need time to get used to the new system. To their absolute surprise, they got 30,000 entries.’