A vague assurance

PM's promise of shielding SMEs from tax scrutiny can't be kept

During a recent visit to poll-bound Gujarat, Prime Minister Narendra Modi tried to reach out to the state’s large community of traders by assuring them that the government would not probe their past records if they joined the new indirect tax regime, the goods and services tax (GST). “I know those who are joining fear that their past records will be checked. I assure you no tax official will be allowed to do that if someone wants to come into the mainstream,” the prime minister said. Small and medium enterprises, which have been struggling due to a combination of demand slowdown and the sudden withdrawal of cash from the system after the note ban, are a worried lot since the implementation of the GST. One of their concerns is that the GST will mean that the government knows the size of their business, which it can use to extrapolate to previous years, and result in scrutiny. Besides the businesses that are completely outside the tax net, many others that were paying taxes ran a part of their business outside the formal system. However, an assurance by the head of the country’s government that tax evaders will be exempted from scrutiny of their past dealings is at once both inappropriate and unfulfillable.

It is almost a year since Mr Modi announced the demonetisation of high-denomination currency notes with the stated aim of curbing black money. As time went by and more and more cash came back into the banking system, the government claimed that moving towards a cashless regime was the real objective and that tax officials would now examine bank accounts to nail those who had hoarded black money. The GST, too, was presented as another step towards this objective. However, both these policy decisions created their own waves of disruption, which have seen an already slowing economy decelerate further. The prime minister perhaps wanted to soothe the nerves of small traders and convince them that being part of the formal economy would not lead to tax terrorism. However, such an assurance by Mr Modi is not only in stark contrast to his own stated position of zero tolerance against corruption, but also sends an unfortunate signal to others in his party that there is nothing wrong in offering amnesty to a select section of voters during election time. 

What makes it worse is that the prime minister’s assurance is an unfulfillable one. Can tax officials be asked to turn a blind eye to past misdemeanors of a trader just because the prime minister has provided an assurance? Also, experience shows that there is no guarantee that even law-abiding traders will not be harassed by tax officials. Rather than making promises that cannot be kept, the government would do well to concentrate on easing the GST’s compliance burden and lowering the tax rates. Those efforts will be far more effective in drawing small and medium businesses into the fold.