Modi’s rushed tax changes

Modi’s rushed tax changes

April 14, 2017
Narendra Modi
Narendra Modi

Indian Prime Minister Narendra Modi does seem like a man very much in a hurry. He is about to drive through the implementation a hugely important tax change in a remarkably short period of time. Last year, he likewise hurtled into monetary change over a stunningly brief timeframe. His demonetization of the 500 and 1,000 rupee notes was a daring move to tackle corruption and tax avoidance. Holders of the high denomination notes could only change them at banks, which thus brought much transparency to the generally murky issue of people’s wealth.

It was a remarkable exercise in logistics for the banking system, made the more complex by the need to keep the controversial move secret. In the event, not everything went smoothly and there was real hardship among small traders who lost business because they refused to accept the large notes and give away their smaller bills. But overall from a purely operational point of view, Modi’s government pulled off an extremely difficult task.

However, by January Delhi was admitting that the radical changes had hit economic growth, but pointed out that the dip was bound to be temporary. On the face of it, it would seem that Modi and his advisers were ill-advised in their professed optimism that there would be no economic downturn. But it is equally possible that they felt that they had to give that assurance, even though they knew it to be wrong, in order to sustain public confidence.

But the real achievement of the operation was its speed. India’s dynamism in unquestionable but the achievements of recent years have come about despite the country’s sloth-slow bureaucracy. Modi knew that if he gave the bureaucrats and the even slower court system a chance to meddle in the changes, they would probably never happen.

Now he is doing it again with the introduction of a General Service Tax, which business must implement by July 1 this year. Despite bipartisan political supports for the GST, it has taken 11 years to prepare it. The first major tax reform since independence in 1947 will replace 15 different tax codes. It will greatly simplify the way in which every business can pay tax and the way in which the authorities can collect it. But is it fair or even reasonable to insist that the GST should be working in two and a half months time? A former finance minister, P Chidambaram is by no means alone in suggesting that October 1 would be a far more realistic date. Other analysts are warning that the effect of the new tax will be inflationary as it draws more trading income clearly within sight of the tax authorities, meaning business will pass on the cost. There will also be an inevitable “rounding up” of prices during the changeover to the new tax.

So should Prime Minister Modi be concerned by these warnings? Privately, he very probably is. But his government has taken one major risk with the demonetization of the two large denomination bank notes, and their courage paid off. Even if there is chaos and disruption when GST kicks in on the first of July, he has taken the view that the confusion will be short-term. And he is undoubtedly right that the long-term gain to the Indian budget and to Indian business is more than worth the rush.


April 14, 2017
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