Making India One

February 27, 2005 on 5:02 pm | In Newspapers, Times of India | No Comments

There is really one paramount issue that concerns us all, and we should remember it tomorrow when the Finance Minister gets up to announce the nation’s Budget. Fifty-seven years after Independence India is sadly not a common market where goods and services move smoothly. If Bollywood, cricket and Hinglish unite us, our irrational system of indirect taxes divides us. More...

Anyone who sells a product across India lives through the nightmare of state sales taxes, central sales tax, entry tax, turnover tax, service tax, excise, octroi—all cascading to make us perhaps the highest indirect taxed nation in the world. Octroi is the worst. Today a truck takes 40 hours to deliver goods from Delhi to Bombay. Of this, only 24 hours are spent driving; the remaining16 hours are spent negotiating bribes at octroi nakas. Thanks to the Golden Quadrilateral, driving time will soon decline to 12 hours as trucks have already begun to move at double the speed. But the pain and corruption of octroi posts will remain.

The answer is to replace this nightmare of taxes by a single flat Goods and Services Tax (GST) that is IT intensive, offers transparent, frictionless interface between taxpayer and collector, and integrates us into one market. As a virtual national VAT, it would tax only the added value at each stage and thus lower our total tax burden. It would discourage cash transactions because no one in the value chain wants to lose credit for taxes already paid. Thus, compliance would rise, taxpayers would swell, and government revenues would multiply. By eliminating the entire plethora of indirect taxes, transaction costs and corruption would also decline, and the nation’s competitiveness would climb. Kelkar’s team had proposed this sensible idea last summer, and I find it shocking that neither CEOs nor the Chambers have fought for it in their pre-Budget dialogues.

This April our states will begin to replace their sales taxes by state VATs. It seems to be a historic first step towards GST, but its design is so flawed that I fear it will give VAT a bad name. It will increase paperwork for taxpayers and tax collectors, multiply checkpoints at borders, cause delays, corruption and invite the wrath of the trade. It is tragic that we are blundering into a paper-based system when technology exists to create a paperless, transparent and corruption free system. Since this VAT is not integrated between states, VAT credits will not flow across borders, and India will not become a common market. As a result, the 20th century’s most important tax innovation, the VAT, may invite a backlash in India.

The answer is not to stop the momentum on state VATs. The solution is for Chidambaram to prove to the states how a modern GST works. The wonderful Tax Information Network (TIN) is now in place, which handles TDS for 350, 000 firms for income tax purposes. It could easily be adapted to manage VAT credits for 100,000 firms. The ensuing transparency will strike a great blow against Excise and India’s entire corrupt indirect tax establishment.

The rub is that the GST requires a buy-in from the states. Since it could usher India’s industrial revolution, the centre ought to sweeten the deal with a gift of Rs 50,000 crores to the states and the nation will still come out ahead. It is tempting to defer big and bold ideas, Mr Chidambaram. Nor is it pleasant to negotiate with our unruly states. It is easier to rationalise by saying that Brazil took 40 years to evolve VAT. But great leaders know they are mortal and won’t get a third chance.

 

 

IRONIES OF THE LEFT

February 13, 2005 on 5:04 pm | In Newspapers, Times of India | No Comments

 

Our politics is filled with ironies. Here is a government led by a dream team of reformers, but all we seem to hear is the Left’s strident criticism of the reforms as the frustrated reformers watch the show. The second paradox is that the Left has historically stood for change but in India today our Left stands rigidly for the status quo. The third absurdity is that the Left advocates the same swadeshi policies of the extreme right wing RSS and SJM, policies that harm consumers and favour producers. The final mockery is that the Indian Left’s policies protect organised labour but hurt the poor.
  
Why should we bother to listen to the Left when it has been consistently wrong in the past fifty years? It opposed computers in our offices. It banned English from primary schools. It supported the Licence Raj, which created the present culture of corruption. It advocated a foreign policy that landed us on the losing side of the Cold War. It backed inefficient government monopolies in preference to competitive markets. It protected 8% organized labour at the expense of the 92% unorganised workers, while feeding the myth that it stood for the poor.   As for the Communists, why should we heed the party which sided with the British during the Quit India movement, which did not condemn the Chinese invasion in 1962, and which was silent during the Emergency when the entire opposition was in jail?
  

In the past nine months the Left has opposed foreign investment as vociferously as the RSS/SJM when the nation desperately needs capital for infrastructure. With oil prices hitting the roof, the Left fought against the rise in cooking gas price; it forced the interest rate hike in Employment Provident Fund; it opposed unbundling of State Electricity Boards, thus preventing electricity reform. All these three acts betray that the Left’s constituency is not the poor but the middle class, who uses cooking gas, saves in EPF and works for the SEBs.
  

The Left foisted on us an Education Cess just when the Kremer/Murlidharan report brought scandalous but solid data proving that one out of four teachers across India are absent from government schools and half the teachers present are not teaching. It is imposing a leaky, corrupt Employment Guarantee program, instead of allowing labour reform, which will create genuine, self-sustaining employment. Instead of finding better ways to improve delivery of services to the poor, it prefers to bankrupt the treasury and undermine the Fiscal Responsibility law. Finally, it will not allow NTPC to revive the orphaned Enron plant, which could solve Maharashtra’s severe power shortage.
  
Henrik Ibsen, the great Norwegian playwright, wrote a powerful drama called, An Enemy of the People.   Its title, it seems to me, is an apt description for the fanatics both of the Left and of the Right. Both promote anti-national policies and both would snuff out human freedom if there were a conflict between the state and the individual. This is why, like Isaiah Berlin, we should distrust all ideologies. As the Budget nears, most of us appreciate that coalition politics has its constraints, but we also want our leaders to vigorously defend reforms. Our dream team mustn’t go down in history as weak leaders who did not have the spine to stand up to their convictions. We want this leadership to snatch the Left’s moral high ground and show citizens how the Left’s policies are designed to keep Indians poor. Above all, we want our leaders to say “No” to Left lunacies, just as Mr Vajpayee learned to ignore politely the idiocies of the RSS and the SJM.
  

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