Saturday, 11 November 2017

GST is India’s Gandhian Society Tax (Sunday Guardian)

By M D Nalapat

For those tied to Gandhian economics, progress means spread of austerity through tax disincentives and stifling of efforts at moving up the consumption chain.
The 10 November reduction in GST rates of less than 200 items need to be followed by many more changes, not only in rates, but in the very structure of the tax. For its numerous rates and its complexity (which makes compliance difficult at best and impossible in many situations) owe their origins to the economics championed by Mahatma Gandhi, and which has been explained in Sriman Narayan’s book on the subject. The aim of Gandhian economics is to ensure the universalisation of simple lifestyles, with minimal reliance on either modern machinery, consumer items or financial systems. Such simplicity is certainly not what voters expected when they cast their ballots for Narendra Modi in 2014. Of course, there is reason for scepticism at the change in mindset of several traducers of the tax. An example is former MoS (PMO) Prithviraj Chavan, who has pointed to the harmful consequences of global financial predators penetrating India. After silence on the matter while serving under international finance champions Manmohan Singh and P. Chidambaram, Chavan red-flagged the September 2015 decision by the NDA government to partner with the US-based “Better Than Cash Alliance”, which was followed two months later by a North Block agreement with USAID “to expand digital payments in India”.
Such alignments ignored the fact that less than a tenth of unaccounted wealth in India is in the form of currency. Or that practically none of the plastic card and wallet companies are Indian-owned, so that billions in dividends, royalties and profits flow out of this country every year as a consequence of the monopoly of foreign-owned plastic payment systems in India. In contrast, China has developed domestic substitutes for Visa, Mastercard, YouTube, Google, Twitter, Facebook and other virtual platforms to a level where these are challenging US-based giants even in major markets.
Unlike the dominant narrative in India, currency is not immune from taxation. At several stages of deployment, especially in a condition of high velocity of circulation, taxes get paid out of cash spent. For example, much of the petrol and diesel bought at the pump gets paid for in cash, thereby ensuring a hefty contribution to government revenues. Only those following the barter-based Gandhian economic model believe that cash is so undesirable as to be best abolished through Government Order. Looking at the way GST rates for different commodities have been fixed, it is clear that Gandhian economists were in command of the process. Such minds regard any lifestyle other than basic living as “sinful”, and therefore levied GST of absurdly high levels even on food eaten in air-conditioned comfort. There is a case for high rates on cigarettes and such other severely harmful products, but why penalise the eating of an idli in air-conditioned comfort? How many of those who cooked up this Gandhian version of GST do without air-conditioners themselves?
The purpose of high rates on items of less than subsistence consumption is clearly to keep people in a low-level consumption mode. Should they seek to move upwards, they are punished with high rates. Such consumption-dampening measures impact growth negatively. Given the double digit growth needed for India to escape the unrest and chaos caused by youth unemployment, North Block needs to focus on fiscal and regulatory modes of accelerating growth, rather than remain obsessed with meeting each year’s expenditure through taxation proposals that slow down future growth. India’s monetary and fiscal policy has long been directed towards adding to the profits of the very US and EU-based financial giants that caused the 2008 global financial crash. The RBI’s traditionally high interest rates ensure profits to foreign players through interest arbitrage. Foreign investors are also assisted in picking up Indian assets cheaply as a consequence of US-centric economic policies on domestic entities. Gandhian economics designed to reduce lifestyle levels of citizens combines with Chicago School-model incentives, enriching only investors from hard currency areas. A revolving door of senior monetary, economic and financial policymakers and those employed in foreign financial companies (either directly or through close relatives) has ensured steps designed to penalise domestic entities to empower foreign entities.
It was fortunate for Henry Ford and for the US economy that there were no Gandhian economists in Washington when he launched the Model T, thereby making automobiles affordable to millions more US citizens. In India, the cars would have immediately been classified by our Gandhian GST Council as “luxuries” and subjected to such high rates of taxation that the market would have been unviable for mass production of such cars. Taxing substantial percentages of turnover through high and unstable GST rates is a certain recipe for sluggish growth. Is it the intention of the framers of such tax rates to ensure that as many citizens as possible be prevented from moving into a better life? Why should an improvement in lifestyle result in the items involved attracting high 18% and super-high 28% GST rates? Progress should mean a steady rise in living standards of the citizenry, from low to middle to high. However, for those tied to Gandhian economics, it means the spread of austerity through tax disincentives and the stifling of efforts at moving up the consumption chain. Such a “Gandhian Socialist” mindset may be comfortable with low rates of growth. However, a government elected to office to satisfy the rising aspirations of 1.26 billion citizens, should set its sights on 10%-15% annual growth through policies that encourage rather than dampen upward mobility in lifestyles. Mahatma Gandhi was happy leading a simple life. However, the people of India—most of whom are anyway forced to lead very simple lives, with more to follow as a consequence of the adoption of Gandhian modes of taxation—expect their government to engineer an upward change in their economic circumstances through low tax rates, low regulations and low interest rates. Mahatma Gandhi was unique in his love of poverty. Most of us lack his self-denying nature, and expect those in charge of the economy to understand that, rather than propel us towards a Gandhian lifestyle by growth-dampening tax policies.

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