YESTERDAY A STUDENT CONFRONTED ME FOR MY VIEWS ON GST .............. I GAVE HIM THIS PIECE FROM MY HISTORY WRITTEN LONG BACK ...

GST - IS THIS SIMPLIFICATION OF TAX SYSTEM ???!!!

More Simplification was required in the tax system.

It is still a tyranny of complexity for common man of India

On a scale of 1 to 100 of simplification of tax structure it is 60. In the current context for the government an ideal tax system collects taxes at various stages of manufacturing, supply, wholesale, retailing and lastly at the final consumption. It is based on the add-on value by the manufacturer, supplier and retailer at each stage of the value chain. Tax paid at each stage is based on the amount of value added and not on the entire amount.

There was much needed to be done !!

The proposals should have defined government programs (expenditures, mandates, regulations) how should they be evaluated for their benefits and these compared with their costs. The proposals are quiet on the main problem of enforcement of tax collection. Much needs to be done there. The government claims that GST would be neutral, equitable, and efficient but the real test will be in costs of compliance, collection and enforcement which is to be seen in days to come. A lot of stress as a follow up needs to be placed on the high compliance costs and enforcement difficulties of implementing the GST in an increasingly globalized world and complex economics of India.

Very simply stated, the ideal taxes in terms of neutrality (minimal distortion of relative prices) are either a comprehensive income or consumption tax. A comprehensive consumption tax is more neutral than an income tax, which distorts the choice between saving and consumption by taxing saving. For some, however, an income (the return for what you give society) tax is more equitable and for others a consumption (what you take from society) tax is more equitable. Use taxes which are generally considered both neutral and equitable and thus desirable when feasible, are not otherwise considered here.

However, the ease of avoidance and costs of compliance are very different for income taxes than for a consumption tax, which necessarily applies to the territory or state in which consumption occurs.

In the proposal there should have been a comprehensive draft on reducing evasion. With increased globalization, GST needed to be more defined within the tax jurisdiction and to detect taxation evasion by moving income as opposed to actual economic activity is becoming more difficult and invasive into the policies of the government. The taxation of business income should be more simplified to route out corruption and increase the confidence and convenience of doing business with transparency in this country.

The citizens of this country would have supported a comprehensive consumption tax (Value Added Tax) for all. They would support government services in proportion to what they take (consume) from the economy rather than on the basis of what they give (produce). By every calculation of actual tax collections, the wealthy would pay more than they do now with existing taxes. Its collection and enforcement should yield enormous simplifications and compliance cost savings. Then the magic which Modi government claims would have worked.

This is a simplification. Then I would have probably appreciated what MODI said – GST is GOOD AND SIMPLE TAX. A lot more needed to have been done for such a claim. Nevertheless government needs to be congratulated for at least initiating the process of simplification and transparency.

A Political word of caution for Modi Government –

Claiming simplification of tax system in this GST – government itself would run into its complexity while implementing the proposals. Government is unprepared for the massive implementation and enforcement. It is complex as can be seen in the reactions of different economic segments. Complexity is actually a polite way of saying “ignorance”. If something is too complex, it means we don’t understand it. Complex systems researchers often cite simple non-linear mathematical relationship that can generate tremendously complicated graphs, so complicated that a slight change in the starting point makes it impossible to predict where the graph will end only a few steps later. The Indian Market is an adaptive market, In the adaptive market framework, complexity means we do not have a narrative for the system. The solution is obvious : The government would have to work hard and smart to understand the underlying structure of the market and quickly and fastly educate the people to expedite the fair implementation of the proposals. You need efficient and effective educators for the people

There is a second problem with complexity for the adaptive market of India. This problem is about the potential divisiveness of special knowledge and the potential for the conflict. The financial system is so complex that only a small number of elites truly understand its function and proper maintenance, this knowledge divides the population into those who know and those who don’t. Take economics away from economists to masses. The real good management of economics takes place when the people for whom is is meant they are part and parcel of doing and understanding it. The political executive should pull up their socks to educate people in what they have done – and what they have missed in not doing, with all honesty– and the mammoth task left in more simplification of the financial regime of taxes.

Much love and kindest regards –

Sudhanshu