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I had a strange dream the other day. I dreamed that I was in heaven. In fact, I had been
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in heaven for a week by then. Every day I would get up in the morning, eat lots of bacon
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and be bathed by voluptuous women wearing aromatic perfumes and little else. Whatever
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music I felt like listening to would be playing in the background, even before I knew that
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I felt like listening to it. And now, random autograph hunters would keep accosting me,
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touching my feet, taking my autograph and telling me what a great podcast the seen
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and the unseen was. But on this particular day, something bad happened. I asked this
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attendant of mine in silk harem pants for my usual mid-morning snack of a seafood platter.
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And he said that there would be no more seafood platters in heaven. I was shocked by this.
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He said it was the order of the canteen manager, Saint Peter. So I headed over to the canteen
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and I met Saint Peter and I demanded to know why there were to be no more seafood platters.
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Saint Peter replied, Amit, Sai, what can I tell you? Life is hard. We have been hit with
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GST. I've been told there's a 5% GST on prawns, 2.3% on fish, unless it is fish with skin
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on it, which is 3.9%, unless it is batter fried, in which case it is 19.2% and there's
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a 14% GST on squid and a 44% tax on octopus because of all the hands. It's driving me
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nuts. There is no way I can comply. So no more seafood platters from today. But this
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is crazy, I said. Why are you even charging GST? This is heaven. Who takes GST from you?
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She looked at me sadly. The devil does, he said. The devil runs everything bro and soon
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he will turn heaven into hell. Welcome to The Scene and The Unseen, our weekly
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podcast on economics, politics and behavioral science. Please welcome your host Amit Verma.
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Welcome to The Scene and The Unseen. Our topic for today is GST, the goods and services tax.
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Now there was an episode of The Scene and The Unseen on this a few months ago with Devangshu
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Dutta before the GST had come into being. While the GST has an awesome intention and
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I support it in theory, there were a lot of practical issues with how it was being implemented.
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Devangshu feared at the time that there were going to be too many slabs and exemptions
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which would make compliance impossible and unleash an inspectorage on businesses. Anyway,
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I have with me in the studio today a good friend of mine, the journalist Vivek Kaul,
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who has been writing about GST a lot since it has been implemented. Vivek, welcome to
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the show. Thanks for having me Amit. Vivek, a few months
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back in January I had done an episode of The Scene and The Unseen with Devangshu Dutta
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on GST and GST hadn't come into force then nevertheless but we discussed among other
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things the intention of GST which we expected to be the scene effect, which is of course
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that it rationalizes all the various different taxes and it vastly simplifies taxation and
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in that sense is on a theoretical level. And on a practical level we discussed the possible
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unintended consequences and Devangshu warned that if there were too many slabs and exemptions
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it would in fact defeat the purpose, make compliance difficult if not impossible and
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perhaps even increase the amount of red tape instead of decreasing it. Now all these months
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later GST is finally in action, you and I both have our GST numbers, we file taxes,
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we are looking at what's happening around us and you've been writing a bit about it.
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So can you tell me what your thoughts are about GST now given the positive intent some
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of which is no doubt manifesting and also the unseen effects?
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Right, so that's like one question which takes care of the entire show.
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Yeah, I'll just shut up now. So I mean as you rightly said and as Devangshu
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would have also said on the show is that GST subsumes a lot of indirect taxes. So I mean
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if I think Prime Minister Narendra Modi made a reference to this as well wherein he said
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around 17 indirect taxes and 23 different CESs are subsumed under it. So prime of AC
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you know if you look at just this fact you cannot be against the idea of a goods and
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services tax. Having said that I mean there are many other
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points which need to be discussed. The first point as again you rightly said is the number
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of different rates under GST. So we have 0%, 0.25%, 3%, 5%, 12%, 18%, 29% and 29% plus
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different CESs. So we have close to I mean 8 rates. I mean it's more than 8 if you look
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at the various combinations of 28% plus CES, right. So this obviously leads to a situation
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where you know the system that evolves tends to become extremely complicated and convoluted.
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So you know if you were to sort of look at it in a very simplistic way there is something
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that Veerappa Moili said in his speech in the parliament wherein he asked is Kit Kat
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chocolate or is it a biscuit or what we call in India biscuit. So that's a very simple
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example. After the implementation of GST some of the examples that have come out are very
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very interesting. So it seems some of the retailers are selling you know one shoe at
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a time because then the rate of GST becomes lower. Like I think the rate of GST goes up
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at 800 rupees. So if it's a 1000 rupee shoe it makes sense for them to sell each shoe
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for 500 each. So this is you know the brilliant Indian Jugaad at work. Then there have also
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been stories about how you know if a woman goes and buys a salwa kamis the dupatta is
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being built separately and I mean you know stuff like that. So there are issues which
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multiple levels of tax create and these issues need to be you know handled. I mean the simplest
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way of handling them is to not have multiple issues, multiple levels of tax. So that is
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the first and foremost thing you know that is happening on the unseen side. Then you
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know the more important issue which I think is not being discussed at all is the impact
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on the informal economy. I mean informal economy is basically you know industry which essentially
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operates outside the rules and regulations of the government and given that the government
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is not able to collect any tax from them. Now so the hope is that the GST will lead
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to a reduction of this informal economy and that will be beneficial for the government.
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Again you know if you were to look at it in a very straightforward simplistic way this
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makes immense sense. I mean why should firms not pay tax, right? Why should some firms
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not pay tax when others are? But that is a very simplistic way of looking at it. Now
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why do I say that is primarily because you know the kind of analysis that has been put
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forward in the media is that once GST comes into force all these informal firms will be
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forced to become formal firms and that will be good for the economy because you know the
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tax collected by the government will go up and then the government can do you know other
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things which it does not have money for right now.
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The point is that you know such transitions never happen smoothly. Now a good example
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that I can think of right now is you know in the late 80s and the early 90s the computerization
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drive in the government and the public sector bank started and that did not happen overnight.
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I mean there was a huge resistance to it. So the point I am trying to make is that you
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know such disruptions do not work very very smoothly.
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I will just take a mild tangent here and I am sure you will agree with me on this is
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that even during demonetization they claim that okay you know getting rid of the informal
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sector and making it formal is a big game and so on and so forth and people often use
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the term informal sector as if it is prima facie something bad.
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I find it very surprising I mean it is not derogatory you know everybody has the right
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to make a living. Exactly.
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I mean if there are no jobs going around I have the right to make a living and that means
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you know I start a tea stall on the road and you know sell tea.
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Exactly and a lot of the informal sector actually exists is forced to exist because of bad laws
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and regulations like all the labor laws by the government itself it is the government's
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fault not the informal sector's fault necessarily and you used to phrase a little while back
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which again struck a chord where you said that you know if the informal sector comes
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into the tax net it is beneficial for the government quote unquote but in my mind what
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is beneficial for the government is not necessarily always beneficial for the country.
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No which is fair so the point I was trying to make is that that is the logic being offered.
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No no I understood that.
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So to okay so to come back you know to try and answer this question in a little more
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detail now there are essentially two features at the heart of the GST I mean they are basically
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you know two ends of the same spectrum but you know explaining the entire concept would
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be a little easier if we consider them to be two separate features.
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One is the idea of input tax credit and the other is the self policing feature that is
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built into the GST they are basically you know two sides of the same coin.
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So what happens is let us say you are a manufacturer you are a car manufacturer now you need multiple
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inputs in order to manufacture that car you cannot manufacture everything yourself.
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So let us say you buy starings from someone you buy seats from someone else you buy tires
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from a third guy and so on and so forth.
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You may even buy engines from someone else for that matter.
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Now what used to happen in the pre GST era is that when you bought those inputs you were
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paying a price in which the tax already paid on those inputs was built into the price.
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So it was like a double tax because then you.
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So now when you paid tax you were not allowed to take credit for the tax that had already
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been paid on the inputs you were using to manufacture your product in this case which
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So what that did was that ultimately when the consumer paid the final price for a car
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he was also paying tax on tax or what we call the cascading effect and he ended up paying
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a lot more than he should have.
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Now in the post GST era what will happen is that the car manufacturer can take an input
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tax credit for all the GST that has been paid on the inputs that he has used in the manufacturing
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So to that extent you know prices will come down because there will no longer be any tax
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So the cascading effect you know goes out of the window.
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Now this is and this is if you follow the news if you follow the news lately most of
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the car and bike manufacturers have cut prices.
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So this is the ideal example of how you know GST works well for the society as a whole
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wherein the total amount the price paid for a product actually.
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It's a dream theoretical example.
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It's a very good example and this is in fact if you look at you know everyone who's
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been talking in support of GST this is the example they end up offering.
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I mean nobody talks about the fact that you know if you go to a restaurant what they have
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simply done is that they have added GST on top of their prices.
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Now what they should have ideally done is they should have subtracted the taxes that
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they used to pay on those prices and then added GST onto it.
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I mean they've just taken their latest prices and added GST onto it.
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Which in a sense is the simplest way out of the moment.
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You don't expect a normal small restaurant guy to sort of you know calculate.
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But then that is also I mean how many times do you buy a new car and how many times do
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you go to a restaurant.
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So that is something that one needs to know.
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I buy three cars a day and I don't eat too much.
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I mean that means you have a lot of money.
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Why are you doing this podcast?
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So the guy taking the input tax credit has to essentially ensure that all you know his
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entire supply chain or value chain or whatever you might call it is registered under the
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goods and services tax which means they have a goods and services tax identification number
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which is you know GSTIN.
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Which makes the whole process smooth.
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And they need to have invoices from all of them.
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Now what that does is that everyone is on the radar of the government and the moment
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that chain breaks you know that someone somewhere is not paying tax.
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So that is the self policing feature which is built into the GST.
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So anyone who wants to take the input tax credit has to ensure that everyone down the
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line is also on the GST.
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So the idea here is that the moment a firm operating in the informal economy comes into
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such a supply chain or a value chain they will have to go formal.
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Because otherwise they will no longer get the business that they used to.
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Now this is a very it's an extremely simplistic way of looking at it because you know a firm
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which is operating in the informal economy just doesn't do it because it doesn't want
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It's not for a reason beyond just just not wanting to pay.
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It is also there because there are other so many rules and regulations that need to be
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followed that if they become a part of the formal economy it would just not be viable
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for them to be in that business.
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On the margins they might have to shut down and therefore the implications of going formal
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So there was this you know very important piece of fact that was highlighted in the
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national manufacturing policy of 2011 which is ultimately what became Make in India that
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an average manufacturing firm has to follow around 70 rules and regulations and needs
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to file around 100 returns a year.
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So a firm which is not a part of the formal economy is it's not just about you know not
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So what happens now you know that GST is in place.
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So such a firm may or may not want to go formal.
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Let's say it decides you know it you know it doesn't go formal and you know it decides
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So the first thing that happens is there are job losses.
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So it needs to be highlighted here that you know we really don't know how big our informal
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economy is and I have seen you know essentially projections or other figures from the informal
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economy constitutes around 35 to 45 percent of the GDP and around 66 to 92 percent of
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the jobs are in the informal economy.
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And these also includes informal jobs in the formal economy wherein you know there are
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firms which report that they have an X number of jobs but they actually have more jobs than
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that which they don't report because of labor laws and labor laws and so on and so forth.
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So you are essentially you know targeting a huge part of the labor force.
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Now let's say these firms shut down.
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Now what happens then obviously there are job losses and then you know there is impact
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on consumption and so on and so forth.
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Now these are things which are not very easy to measure okay.
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The second thing that is a little more obvious is that when an informal firm shuts down a
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smaller formal firm may decide to produce more in order to take over that business which
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But again that would depend on you know whether it is viable for them to do so or not right.
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So you know many formal firms continue to want to stay small so that they don't come
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under the ambit of labor laws I mean this is what we were talking.
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Now Jagdish Bhagwati and Arvind Panagariya write in India's Trust with Destiny the cost
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due to labor legislations rise progressively in discrete steps at 7, 10, 20, 50 and 100
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As the firm size rises from 6 regular workers towards 100 at no point between two thresholds
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is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying
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So which basically means that if firms operating in the informal economy shut down the smaller
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formal firms may not be in a position to take over that business.
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Exactly it becomes a negative sum game it is not as if someone will take over that bit
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It is that the firm in the informal sector was informal because it was impossible to
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service that demand and carry out that function in a formal way because of the laws and regulations.
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So what will happen is again is that the formal the bigger formal firms will now have a larger
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chunk of the market and that will give them a better pricing power than they have right
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now you know a lot of the informal firms essentially ensure that the larger formal firms do not
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you know go beyond a certain level when it comes to pricing their products.
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So this is a possibility you know I am not saying that this is exactly the way it will
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play out because right now you know there is not enough data to say so but it is a possibility
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and it needs to be discussed and the sad part is that it is not being discussed.
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I mean to use a very loose analogy and not an exact one if you force all chai balas out
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of existence then the cheapest tea that was earlier available will simply not be available
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And everybody cannot you know go to a restaurant.
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You know a 30 rupee tea at a restaurant which is true.
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So how could this have been ameliorated in the design of the GST itself?
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I mean that is very difficult I mean I do not think it will it could have been ameliorated
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it is a see when you when you make such a disruptive big change there will be a certain
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cost that is attached to it.
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The second thing that could have been done possibly is that you know the ease of doing
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business could have been improved.
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You could have gotten rid of a lot of these labor laws or a lot of you know the so called
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inspector Raj wherein there are you know at least 10 odd inspectors who can come and stop
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your business at any point of time.
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So if an effort had been made in order to improve you know things at least you know
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at that level some of these informal forms would have been in a better position right
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now than they actually are.
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In fact businessmen I speak to tell me about the fear of a new and improved inspector Raj
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for the simple reason that now GST because of all its exemptions and slabs and whatever
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it makes compliance impossible.
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You know when I had done that episode with Debang Shu he had taken a hypothetical example
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of say there is a computer manufacturer and he is using like 30 to 300 different components
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in his computer which he is buying from separate places and many of them are very vague as
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to which slab they go into or whatever so compliance is impossible and you leave it
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to the discretion of the inspector he can harass you and say that no Kit Kat is not
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a chocolate it is a biscuit or the other way around and one of the expectations of the
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GST was that for example the long queues of trucks at state borders would gradually go
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down and like you mentioned before the show there is a business standard report which
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says that that's really not happening those queues are still there and that friction in
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doing business with GST was supposed to end hasn't really happened.
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So those queues are there not because of different reasons it's like you know if you want to
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enter Delhi you have to if a truck has to enter Delhi it now needs to pay a green tax
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as well so you know a lot of taxes have been subsumed under the GST but there are still
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So if you don't subsume all of them is kind of pointless.
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So if you like you know the other great example is Gujarat if you want to enter Gujarat they
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will check whether you know there is liquor in the truck or not.
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So there are these I mean little things which are there which do hamper the you know smooth
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movement of trucks but having said that I mean things are a little better than they
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Now you know you were talking about Kit Kat whether it's a biscuit or a chocolate.
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There was a news report in the Times of India which essentially quotes a supermarket chain
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owner as saying tax on snacks like aloo bhujiya, potato chips, samosa, kachori is 12 percent.
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Now the tax rate for cashews is 5 percent but I can't figure out if masala cashew is
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a snack or a standalone item.
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So similar issues have cropped up when it comes to sweets.
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Milk sweets come under 5 percent bracket but the moment a silver foil is put on to it the
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tax shoots up to 18 percent.
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So it's like you know whether a particular brand of coconut oil is a cooking oil or a
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No and the bizarre thing is that a these become levers with which government inspectors can
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harass you and extort bribes which is essentially the whole point of government inspectors and
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this is what GST was supposed to avoid.
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You have one tax for G goods, one tax for S services and that's it.
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You don't have to try and figure out whether this is a chocolate or a bar of gold or whatever
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it might be you know and you know you might have 0 percent on some items which you want
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to exempt in a particularly high GST on say cigarettes or whatever sinful items but otherwise
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essentially everything is one rate and that isn't the case which seems to me to defeat
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the purpose because the transaction cost for the economy of shifting from one system to
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the other seems to me to be huge and that involves it would seem from what you're saying
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about the informal sector as well a huge humanitarian cost.
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I mean that I guess we'll figure out over a period of time how that plays out.
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So tell me, sorry to interrupt you, you spoke about earlier the problem of measuring the
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impact on the informal sector and we saw this even after demonetization where the informal
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sector was expected to be worst hit but there were constantly disputes over the numbers
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No, so that was because what happens is when you calculate the GDP what they do is because
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they don't have numbers for the informal sector they measure the formal sector and then they
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assume that the informal sector is a certain proportion of the formal sector.
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So that is essentially a statistical quirk which is essentially used to calculate the
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So what happened there was because nobody measured the impact on the informal sector
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there was no impact on the GDP.
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Which is like the tree falling in a forest if no one is there to see it, did it fall?
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In fact there are a lot of other issues also which these multiple rates have raised in
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the sense that a lot of you know I mean take something like diamonds okay, now diamonds
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have been the GST on diamonds is 0.25% whereas the GST on matchsticks which are a lot more
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useful than diamonds are is 5%.
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Different kinds of carbon involved.
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That's bizarre I mean I don't see any reason as to why you know the GST on diamonds has
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People might say that this is probably because you know we sort of import and then export
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So in order to ensure that India's diamond industry remains competitive globally the
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But then I mean so when you have these multiple rates it raises all these questions.
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So you have you know the GST on condoms is 0% whereas the GST on sanitary napkins is
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Now the explanation for this is that the GST council which essentially decided on these
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rates their objective was to achieve what they call the best fitment which essentially
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means is that they had to ensure that the GST rate on a product was close to the overall
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taxes on that product that were there till that point of time.
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Having said that you know when you look at the you know people who formed a part of the
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GST council I mean it included the finance minister of India and you know finance minister
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of all the states I mean they could have done a little better than this.
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I mean the best fitment the phrase in the context of condoms is music and I'm sure
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the council in question was mostly men which is one criticism.
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In fact they were all men I'm sure.
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But you know at some level that's also a diversion when you start arguing about oh X is so much
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So my point is that it's not about what should be what rate it is that they should all be
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That point is well taken.
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I am making another point my point is if you have different rates at least you know look
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into what should be at what rate.
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And another consequence within the political economy of having different rates is that
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then you can give favored rates to favored interest groups and you know the political
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corruption just goes up massively.
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I mean that will always be there I mean you really cannot do much about it.
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I mean take the fact that real estate does not come under GST.
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And we shall discuss that in a future episode Vivek thanks so much for coming on the show
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and GST I suspect is a subject we will again revisit a few months from now.
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I mean this will practically I mean you know it will keep coming back.
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It's going to be a recurring theme.
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Thanks for having me Amit.
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If you enjoyed listening to this episode check out our previous episode on GST.
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In fact check out all our previous episodes at sceneunseen.in.
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You can follow Vivek on Twitter at call underscore Vivek and you can buy his books at your local
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online or offline retailer.
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His easy money trilogy demystifies the history and usage of money and his latest book is
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called India's Big Government.
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You can follow me on Twitter at Amit Verma or A-M-I-T-V-A-R-M-A goodbye for now.
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If you enjoyed listening to the scene in the unseen check out another great show by IVM
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podcast made in India hosted by my friend May Thomas where every week she profiles up
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and coming independent Indian bands.
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You can download it on any podcasting networks.
