One economic India: Transition to regime complicated, says Economic Survey

It adds, states haven't tried to keep rates low & simple; revenue collection remains a key challenge

Looking at goods and service tax (GST) from the prism of One Economic India, the Economic Survey 2016-17 has criticised the current structure of the new tax regime, even though the Constitution provides flexibility. It has pitched for extending the scope of GST to include tax on land and other immovable property that are key investment avenues for black money. This could propel gross domestic product (GDP) growth to 8-10 per cent.

Though it will create a common Indian market and improve compliance, the Survey admitted the transition to GST was “so complicated from an administrative and technology perspective that revenue collection will take some time to reach full potential”. States, it said, weren’t exerting enough pressure to keep GST rates low and simple to make the indirect tax regime efficient and effective. “The lack of such pressures especially from the states was surprising since they were guaranteed compensation by the Centre,” it said.

There is a risk of creating an unduly complicated structure with multiple and excessively high peak rates in order to ensure low tax rates, thereby foregoing large services efficiency gains, it said. There was a desire to ensure the future structure of rates mimicked the complicated status quo by ensuring rates on essentials were kept low and on luxuries kept sufficiently high. 

This is when the introduction of GST offered an excellent opportunity to rationalise domestic indirect taxes so that they do not discriminate in the case of apparels against the production of clothing that uses man-made fibre, and in the case of footwear against the production of non-leather based footwear. “While strictly not an instrument of redistribution, even the design of the GST reveals the underlying tensions.” 

It said at a time when the country was embracing cooperative federalism, the question to ponder was whether the law should at least aspire to the weak standards of a common international market embraced by other countries even if India couldn’t embrace the strong standards of a common market prevalent in the US and EU. 

On the basis of “Big Data” from the GST Network, the Survey said that contrary to perception and to some current estimates, India was highly integrated internally with considerable flow of both people and goods. Interstate exchanges between and within companies amounted to at least 54 per cent of GDP and 1.7 times international trade. It said the current structure of domestic taxes as well as area-based tax exemption might actually bias economic activity towards more internal trade. Besides, smaller states tend to trade more while the manufacturing states of Tamil Nadu, Maharashtra and Gujarat tend to have trade surpluses, exporting more than importing.

The Survey used five coefficients including state GDP, proximity, language, distance and other benchmarks to theorise on inter-state trade. The language dummy tries to capture whether Hindi-speaking states tend to trade with each other more than others. Interestingly, it concludes language does not significantly impact inter-firm trade but it rises to 90 per cent confidence for intra-firm trades.

Survey Turns to Jaitley for Constitutional, Legal Insight

The Economic Survey is supposed to give advice to the finance minister, but probably for the first time it was benefitted from the expertise of the minister on constitutional and legal matters.  

Finance Minister Arun Jaitley penned a section on India’s Constitutional Provisions and Jurisprudence in the Survey. This has given a legal dimension to GST in form of a comparison between the Indian Constitution and the World Trade Organization (WTO). It says WTO heavily circumscribes departures from a common market across widely varying countries whereas similar departures between states within India is easily condoned by the Constitution. 

This conclusion is backed by the argument that the Constitution gives more freedom to depart from anti-protectionism requirements even though WTO imposes the most favoured nation and national treatment requirement just as the Constitution does. The reasons for invoking departures from free trade and common market principles are more clearly and narrowly specified in the WTO than in the Constitution which refers to an open-ended “public interest”. Moreover, criteria have to be met before the departure can be justified. “In the WTO, the measure must not be a form of disguised protectionism and above all must be ‘necessary’,” it said.