A Social Contract for Economic Recovery

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.