While Nirmala Sitharaman’s big bang announcement on corporate-tax reduction on Friday has had a huge positive impact on industry sentiments, the day ended with a whimper with her announcements of ‘tinkerings’ with the goods and service tax (GST).
GST, the lifeblood of Indian commerce, has become the proverbial millstone around the neck of Indian business specially tiny businesses and small and medium enterprises. A roadside eatery owner mentioned to me that after paying all the various inspectors their ‘mamul’ -labour department inspectors, municipal corporation predators, the local beat police who prey on petty shopkeepers, the weights and measures officials who harass vulnerable vendors, the inspectors of the the health licence department who threaten closure and after overcoming other unexpected setbacks like bundhs , he was barely left with 10 to 15 per cent profit to feed and provide for his family, which the new complex GST was taking away making his life a nightmare and survival difficult.
Our new FM can be reminded of the KISS principle.
KISS – Keep It Simple, Stupid – is a well-known acronym and an accepted credo in business. Attributed to Lockheed aircraft engineer Kelly Johnson, it was to urge his engineers to keep aircraft design so simple that even a stupid person should be able to repair the aircraft with ordinary tools on the combat field.
Bureaucracy, the world over, is usually oblivious to the KISS principle. An Amazon ad boasts that it sells more than a crore different products, and besides products, there are myriad services, with more categories added every day. In this context, asking bureaucrats to identify and categorise all products and services for differential tax slabs in the GST regime is the surest way to get into a muddle.
Empirical data from across the world on the benefits of a unified single tax is incontrovertible. So, an unambiguous directive to the bureaucracy is necessary to come up with just two categories: goods eligible for zero tax, and all the rest to come under a single rate, say between 10% and 15% or even lower. That means everything, except those specifically exempt, is taxed. That will not only be easy to comply but will result in willing compliance and higher collections, while minimising corruption.
This needs bold and clear reformist thinking at the political level. Take the so-called ‘sin’ taxes. They make no sense and are at cross purposes with the government’s overarching policies of generating growth and creating jobs under the much-touted ‘Make In India’. In this, the GST Council’s tax rate cut in hotel tariffs is welcome but not enough.
A typical 300 room five-star hotel generates direct employment to around 500 people, 90% of whom are waiters, housekeeping staff, front desk, security and concierge staff, besides cooks, chefs, managers, financial and clerical staff. There are a host of others employed in associated services such as the spa, gift shops and swimming pool.
The hotel also generates indirect employment in ancillary areas: it buys bed linen, furnishings, rugs, and carpets (that are periodically replaced, generating employment in textiles), air conditioners, cutlery, electrical fittings, furniture … and consumes enormous quantities of food produce. All these generate jobs and income for farmers, construction contractors, artisans, and other manufacturers.
Five-star hotels also generate foreign exchange by attracting rich tourists and visitors and has a direct bearing on FDI. So, it is unwise to tax these hotels to death. It’s the same warped view that has high taxes on air conditioners, and cakes or luxury cars. They generate lacs of ancillary jobs downstream. Take chocolates for instance. Their two biggest raw materials are cocoa and sugar. So an unthinking hit on chocolate will hit the stomach of both the factory worker and farmer.
One must figure out how to rev up the economy by making the rich spend, and move more people up the value chain to buy more chocolates and ACs, and refrigerators, instead of designing a tax system that keeps these products out of the new emerging consumer class’s reach. Similarly, in a roadside bakery, for example, officials have excelled in the art of creating confusion – bread is zero tax, but the vegetable sandwich is in the 5% tax slab, hitting the vegetable grower directly. Bun is zero but bun with a few raisins is 5%. Mixtures and namkeens are 12 and cakes and biscuits are 18%! It’s the same with taxes on wine, rum, and beer, which generate huge employment and are the backbone of the grapes and sugarcane farming and cocoa industry.
The low-cost airline model is successful because of the KISS principle: elimination of all frills – food, water, freebies, assigned seats, etc – single-class seating, point-to-point travel with no code-sharing, direct internet booking, no middlemen … It’s a Udupi self-service hotel in the sky.
The FM instead of making haste slowly as has been the case till now should take a cue from the PM who hinted at major reforms in GST and do away with all the confusing tax slabs in one fell swoop. She can then usher in a truly single low tax rate along with a list of exempt items. That will ensure compliance, widen the tax net, boost the economy, create jobs and increase tax collection as witnessed in many countries – a move that will be both populist and well-regarded by economists. The GST has come in for a lot of flak and she can use this opportunity and make bold decisions.
Even as Sitharaman has done the right thing and brought cheer to many by reducing corporate income tax; imposition of higher taxes, GST included, have never solved a country’s economic woes. That needs deep and far-reaching reforms. She will do well to remember what Winston Churchill said – ” For a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself by the handle. “
DISCLAIMER : Views expressed above are the author’s own.