A Different Interpretation of GST

Unless you were living in a cave the past few months you must have heard about the Goods and Services Tax that has been launched in India, which happened a few weeks ago with great fanfare, expectations, and reservations. GST was supposed to solve a number of systemic issues in the Indian economic landscape, but here are my thoughts. This is a purely personal interpretation of GST based on observations and frustrations, as a business owner myself. But to be clear, I do not have any formal training in economics or fiscal sciences, this is simply based out of general reading and learning that I have accumulated over the past years.

First, the facts.

Roughly about 2% of the population in India pays income tax. That’s right, in a nation of a billion-and-a-quarter people, only about 25,000,000 people pay taxes. This must be a record of sorts, of the dubious kind I mean. The political will to crack the whip to increase the tax paying base is simply lacking or impossible because of the societal and cultural ethos.

I have a relative whose primary income is agricultural and religious services. He does not file taxes, though earns in a legal/moral/ethical way. He has a big house, expensive cars and whatnot. Looking at people like him frustrates the hell out of me. The direct tax collections are woefully inadequate to run the government, construct infrastructure and provide citizen services. This leads to either bankruptcy, rampant inflation or lack of proper physical and social infrastructure for citizens or some dangerous combination of the three.

Maybe there is a different solution to the problem. As the saying goes, pick your battles— the government, instead of fighting the taxation-base problem took the route of implementing a solid hard-to-evade indirect tax. Basically there are two schools of thought in taxation, tax at income source (direct tax) or tax on consumption (indirect tax). As it is with almost everything, there are positives and negatives with either. Though most significant countries have chosen the former, there is solid proof that the latter also does work.

Given the realities of the Indian polity, tax on consumption might be the only way to increase the tax base. Everybody has to consume goods and services, rich or poor. Presumably, the rich consume more of goods of the luxury variety. So tuning the GST rate on various goods and services will provide some sort of equity in the society.

There is one fundamental flaw in the approach, folks like me who pay income tax have to face the ‘burden’ of paying the GST too. Hopefully this is temporary, but needs to be fixed. We will have to do something really innovative to fix the tax collection problem. The Goods and Services tax is a step in the right direction. Maybe someday, we will all pay consumption tax and folks who pay direct income tax they would get credit against the service tax. It is an opportunity for India to do something drastic and show the world how it is done.

In any case, let’s wait and watch how it all turns out. Comments welcome.

Engineering Ezetap

Stories and revelations of the engineering team at India’s leading payments company.

Bhaktha Keshavachar

Written by

Engineering Ezetap

Stories and revelations of the engineering team at India’s leading payments company.

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