Context: The case for cooperation on Goods and Services Tax (GST).
Challenges to the GST Regime:
Design and Implementation Issues:For E.g. Although India’s auto-manufacturing has raised exports over 5% of total exports of $323 billion in 2018, the sales are slowed down due to difficulties in transitioning to GST.
Compounded Disruptions: due to new technologies (electric vehicles), stricter pollution controls (BSVI), confusion about diesel regulation, and a slowing economy.
Misplaced policies: For, E.g. in the case of telecom sector growth is impacted due to:
Inefficient resource allocation and pricing.
Enforcing questionable interpretations of law through ill-conceived litigations have seriously constrained India’s productive capacity
Selective preferential treatment.
Various Aspects of considering GST rates
Analyzing the likely effects of lowered tax rates from 28% to 12% or 5%
Failure: Due to the fall in sales and contracting domestic demand, it may not be able to attract international manufacturers due to uncertainties and infrastructural deficiencies.
Success: However, India’s experience with the telecom franchise fees after 2003 shows a significant reduction in revenue share from operators from 15% to 8% leading to explosive growth.
Need for Sound Domestic Market: Exports (especially automotive) needs a sound domestic market.
Slowing domestic sales and cash flows can affect export markets, compelling foreign buyers to seek alternative manufacturing sources.
Devastating effect of lost sales on employment: as the manufacturing sector provides direct and indirect jobs to many millions.
Way Forward:
Need of a Social/Economic Contract: between the triad of government, industry and consumers, influence by media and the judiciary.
For, E.g. taking the case of the GST regime, the harmony between the triad is necessitated due to their role in controlling the market -
The honest price of a product is decided by the user-perceived value at a price depending on supply and demand.
For any rate, government collections increase as product/service delivery increases.
However, demand usually declines with increasing prices.
As the tax rate increases, beyond some level, sales revenues will decline, as will GST collections.
Administrative authorities and the political leadership need to cooperate as the basis of an economic contract.
Maximize Public Benefit: There is a need to devise a GST rate which is reasonable and contribute to the common good, given its circumstances.
Requirement of Constructive Attitude and honest recognition of lack of Institutional support for organization and management including:
A systems approach, disciplined, end-to-end processes (starting with timely government payments).
Professional facilitation and legal rigour.
Expert financial modelling and simulation as decision support.