Monday, February 28, 2005

Making India One

Times of India, Feb 27, 2005

There is really one paramount issue that concerns us all, and we should remember it tomorrow when the Finance Minister gets up to announce the nation’s Budget. Fifty-seven years after Independence India is sadly not a common market where goods and services move smoothly. If Bollywood, cricket and Hinglish unite us, our irrational system of indirect taxes divides us.

Anyone who sells a product across India lives through the nightmare of state sales taxes, central sales tax, entry tax, turnover tax, service tax, excise, octroi—all cascading to make us perhaps the highest indirect taxed nation in the world. Octroi is the worst. Today a truck takes 40 hours to deliver goods from Delhi to Bombay. Of this, only 24 hours are spent driving; the remaining16 hours are spent negotiating bribes at octroi nakas. Thanks to the Golden Quadrilateral, driving time will soon decline to 12 hours as trucks have already begun to move at double the speed. But the pain and corruption of octroi posts will remain.

The answer is to replace this nightmare of taxes by a single flat Goods and Services Tax (GST) that is IT intensive, offers transparent, frictionless interface between taxpayer and collector, and integrates us into one market. As a virtual national VAT, it would tax only the added value at each stage and thus lower our total tax burden. It would discourage cash transactions because no one in the value chain wants to lose credit for taxes already paid. Thus, compliance would rise, taxpayers would swell, and government revenues would multiply. By eliminating the entire plethora of indirect taxes, transaction costs and corruption would also decline, and the nation’s competitiveness would climb. Kelkar’s team had proposed this sensible idea last summer, and I find it shocking that neither CEOs nor the Chambers have fought for it in their pre-Budget dialogues.

This April our states will begin to replace their sales taxes by state VATs. It seems to be a historic first step towards GST, but its design is so flawed that I fear it will give VAT a bad name. It will increase paperwork for taxpayers and tax collectors, multiply checkpoints at borders, cause delays, corruption and invite the wrath of the trade. It is tragic that we are blundering into a paper-based system when technology exists to create a paperless, transparent and corruption free system. Since this VAT is not integrated between states, VAT credits will not flow across borders, and India will not become a common market. As a result, the 20th century’s most important tax innovation, the VAT, may invite a backlash in India.

The answer is not to stop the momentum on state VATs. The solution is for Chidambaram to prove to the states how a modern GST works. The wonderful Tax Information Network (TIN) is now in place, which handles TDS for 350, 000 firms for income tax purposes. It could easily be adapted to manage VAT credits for 100,000 firms. The ensuing transparency will strike a great blow against Excise and India’s entire corrupt indirect tax establishment.

The rub is that the GST requires a buy-in from the states. Since it could usher India’s industrial revolution, the centre ought to sweeten the deal with a gift of Rs 50,000 crores to the states and the nation will still come out ahead. It is tempting to defer big and bold ideas, Mr Chidambaram. Nor is it pleasant to negotiate with our unruly states. It is easier to rationalise by saying that Brazil took 40 years to evolve VAT. But great leaders know they are mortal and won’t get a third chance.

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