Waxing Tax

Earlier this month, the Government of India placed a paper on a new Direct Taxation Code in the public domain for discussion. Such progressive procedure is as uncommon as it is laudable in a nation where administrative opaqueness has often been used to create latitude for backroom manoeuvering. In fact, the play in influence-peddling is believed to be so potent and widespread (so difficult to miss in Dilli's flaunt-it-if-have-it culture) that subterfuge of this kind is not merely accepted but expected. Drawing inspiration from the fortunes of sundry such power-broking carpetbaggers, if no other reason, it is incumbent on us to celebrate this wiki approach to policy formulation.

The jury, of course, is still out as to the merits of the actual proposal. It certainly deserves minute scrutiny and my current inability to appreciate its fine print is far too real to hazard any early judgement. Yet, it must be recorded that it heralds the resurrection of one eminently logical economic shibboleth hitherto consigned to the dustbin: The premise of lower incidence promoting higher compliance had been anathema to North Block mandarins for years and finally seems coming of age. A second toast to the Finance Minister!

Unfortunately, not much of the succeeding discourse on the tax code may be available for ready view in the medium term. The promise in this citizen-friendly reform however gives one the confidence to ponder the fate of another far-reaching change - the GST. Similar streamlining of tax administration has already been accomplished by almost every self-respecting economy of benchmark size and scale. The Indian effort has, lamentably, fallen into a quasi-political quagmire. Given the federal nature of the country's revenue system, GST can only come by via legislation, including constitutional amendments, to junk existing laws as also the creation of a common dual (State and Central) framework it perforce requires.

Building universal consensus on the GST, though, has led to endless debate over its management mechanism, including creation of appropriate infrastructure, and on sharing of its spoils. Equally, it may be simplistic to expect that the fact of different political formations being in power in key States and the Centre, and the much-voiced 'loss' to the former (plus concomitant demands for compensation) is merely a coincidence. It is, more likely, a refined filibustering tactic.

It does appear therefore that the question of whether a nationwide GST is actually needed, is a moot one. Much like Direct Taxes, India's Indirect revenue regime is an elephantine and often conflict-prone labyrinth of state and federal levies that we berated when studying Economics in college fifteen years ago (it was not new then; it is not new now). Fact is that the framework carries the baggage of its roots in our colonial past, and is arguably anachronistic. Applying whatever little one remembers (not that it was ever entirely put to rote!) of economic theory, there are two clear wins in its reform. First, elimination of multiplicity simplifies tax structure and fosters compliance (similar to what Pranab da has already been commended on above). Second, creation of a common market and lower tax burden boosts production, directly and via increased investible surplus: the logic on which EU was born, or ASEAN thrives today.

While actual gains from the implementation of a reformed Direct or Indirect Taxes regime are either the subject of impassioned debate (my Commie friends any way derive sustenance from chatter, especially of the idle kind) or entail expertise in macroeconomic theory more than is my métier, it is likely that Come April we may be raising ours for two and a half cheers to Mr Mukherjee!