#
Did you know that Parsi's in Mumbai, instead of being left at the Tower of Silence after
#
they die, are now cremated?
#
Because a cow fell sick in the early 1990s.
#
Did you know that the smog in Delhi is caused by something that farmers in Punjab do, and
#
that there's no way to stop them?
#
Did you know that there wasn't one gas tragedy in Bhopal, but three?
#
One of them was seen, but two were unseen.
#
Did you know that many well-intentioned government policies hurt the people they're supposed
#
Why was demonetization a bad idea?
#
How should GST have been implemented?
#
Why are all our politicians so corrupt when not all of them are bad people?
#
I'm Amit Verma, and in my weekly podcast, The Seen and the Unseen, I take a shot at
#
answering all these questions and many more.
#
I aim to go beyond the seen and show you the unseen effects of public policy and private
#
I speak to experts on economics, political philosophy, cognitive neuroscience, and constitutional
#
law so that their insights can blow not only my mind, but also yours.
#
The Seen and the Unseen releases every Monday.
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So do check out the archives and follow the show at seenunseen.in.
#
You can also subscribe to The Seen and the Unseen on whatever podcast app you happen
#
And now let's move on to the show.
#
I was passing by a football stadium the other day, and I saw that there was a giant party
#
There was loud music and the aroma of delicious food.
#
I decided to gatecrash the party.
#
I sneaked in, and I found that there were hundreds of people, mostly pot-bellied men,
#
dancing wildly, shooting guns in the air, hugging each other, and shouting, Modiji Zindabad,
#
There was a giant picture of Narendra Modi on one wall, with garlands around it.
#
The sound system blared out loud bhajans with a disco beat.
#
I stopped one gentleman, who had an open bottle of Old Monk in his hand, and asked him why
#
He told me, because Achche Dina are here, Modiji has brought us Achche Dina.
#
And at this, the crowd started chanting, Achche Dina, Achche Dina, Achche Dina.
#
Wait a minute, I asked the guy.
#
You surely don't believe in that Achche Dina nonsense, do you?
#
We know now that those were empty promises.
#
The man turned to me with a beat-fix smile.
#
They weren't empty promises for us, he said.
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In fact, our Dins could not be any more Achche.
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You see, we are chartered accountants.
#
Welcome to The Scene and The Unseen, our weekly podcast on economics, politics, and
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Please welcome your host, Amit Barma.
#
Welcome to The Scene and The Unseen.
#
In this episode, I'm going to be talking about the GST, the goods and services tax.
#
Of the Modi government's big economic measures, most people now agree that demonetization
#
was a huge failure, if not an outright humanitarian disaster.
#
I call it the largest assault on property rights in the history of humanity.
#
But on GST, opinion is mixed.
#
People like the idea of a good and simple tax, as it is sometimes called.
#
And I must say that the idea behind the tax appeals to me as well.
#
But is it really a good and simple tax?
#
Most critics say that the implementation of GST was badly flawed and argue only about
#
Well, to discuss the GST with me, I've invited my good friend Shruti Rajgopalan, who teaches
#
economics at Purchase College in the State University of New York.
#
A quick disclaimer, my conversation with her was recorded on Skype, so I apologize in advance
#
if the sound quality drops in parts.
#
But before we go there, let's take a quick commercial break.
#
If this happens to be the only podcast you listen to, well, you need to listen to some
#
Check out the ones from IVM Podcasts who co-produced the show with me.
#
Go to ivmpodcasts.com or download the IVM app and you'll find a host of great Indian
#
podcasts that cover every subject you could think of.
#
From the magazine I edit, praghati, I think, praghati.com, there is the Praghati Podcast,
#
hosted by Hamsini Hariharan and Pawan Srinath.
#
There is a brilliant Hindi podcast, Puliya Baazi, hosted by Pranay Kutaswani and Saurabh
#
And apart from these policy podcasts, IVM has shows that cover music, films, finance,
#
sports, sci-fi, tech and the LGBT community, all under one roof, or rather all in one app.
#
So download the IVM Podcasts app today.
#
Shruti, welcome to the Scene in the Unseen.
#
Shruti, I've started this new tradition on my shows of just chatting with my guests and
#
asking them a few personal questions so the listeners can get to know them a little better.
#
Otherwise one presumes that listeners knows them as well as I may and we go straight on
#
to the dry technical stuff.
#
So you're an economist and a lawyer.
#
How did you land up here?
#
Because I have made many, many, many mistakes in my life.
#
No, I studied economics at the undergrad level at Delhi University, which was great fun.
#
I always thought I would end up being a lawyer and end up going to Delhi University to the
#
Faculty of Law to get a law degree.
#
And about a semester or a semester and a half into it, I really didn't enjoy the course
#
I loved studying the law, but I was quite certain I wouldn't enjoy the practice.
#
And as I did more legal research, I figured that at the core of it, I'm an economist.
#
So I don't think in normative terms, I really think in positive terms as an analytical framework.
#
So even though I loved studying law, law doesn't come with its own analytical framework, right?
#
Can you explain that in simple language, not thinking in normative terms and thinking in
#
So you can basically make arguments on either side when you have a legal case.
#
And this is not to say that every argument is equally valid, right?
#
So it depends on what kind of structure you have, what is the style of argumentation,
#
what is the standard in each particular legal system.
#
But at the end of the day, you don't get an answer like if you asked me, Shruti, I'm thinking
#
of taking a walk out of the window on the third floor.
#
What do you think is going to happen?
#
We all know what's going to happen.
#
You're going to fall down, right?
#
Similarly, economics gives you a very, very clean analytical framework, right?
#
This is the law of opportunity cost, the law of scarcity, right?
#
All positive analysis is strongly rooted in these ideas.
#
And if you ask like the window question, what happens when the price of onions goes up?
#
A simple answer is the quantity demanded of onions goes down.
#
So economics gives you a very clean, positive framework.
#
Now you may not like the answer that the quantity demanded of the onions went down, right?
#
You may not like the outcome, but it gives you a very clean way to think about the world,
#
How do people in the world behave when they confront scarcity and when they have certain
#
incentives provided by the institutional structure?
#
So I found this very missing in law.
#
In law, people make legal decisions and create legal policy as if they were not to be implemented
#
As if these policies are going to be implemented by an omniscient, benevolent, all-knowing,
#
just, fair, mythical creature.
#
So that part of the law really bothered me.
#
And so I decided that the correct field for me is really law and economics, which allows
#
me to look at legal structures, which I'm fascinated by.
#
Because the analytical framework comes from economics, all the assumptions that you make
#
about the world come from the discipline of economics.
#
So simple assumptions like we analyze people at the individual level, not at the organizational
#
or the structural level, right?
#
That individuals are self-interested and they respond to incentives and that we live in
#
So if you start with these basic assumptions, you would be surprised how quickly you can
#
get insight into how complex systems work, which is the entire discipline of law and
#
So that really fascinated me.
#
Then I decided, you know, I will go into law and economics and I eventually ended up getting
#
I was very interested in some sub-fields.
#
One of them is constitutional economics and the other is public choice.
#
So I went to George Mason University, where at the time James Buchanan, Gordon Tullock,
#
you know, sort of the really the people who were there at the foundation of these disciplines
#
were teaching there and their students and their tradition.
#
So I went to George Mason to study this stuff and eventually just fell in love with it.
#
And can you sort of tell our listeners a little bit more about what is constitutional economics
#
and what do you study when you do that and what is public choice theory?
#
So constitutional economics is just what I was telling you about law and economics, but
#
specifically for constitutional rules, there are two parts to it.
#
One is sort of like, think of it as a sort of thought experiment.
#
If five people got together and their end goal was X, what kind of rules are they likely
#
OK, so this could be you play poker, it could be at the level of poker or parlor games,
#
Or it could be at the level of what should be the individual rights framework in a system.
#
So a good example of constitutional economics is something like analyzing the difference
#
between presidential and parliamentary systems, right?
#
This is at the constitutional level.
#
If you were framing a constitution today, how would you frame it?
#
Would you go for a presidential system or would you go for a parliamentary system?
#
And that depends on what the individual framers have in mind as their end goals, right?
#
So some people believe that power is very much concentrated in the executive, in a presidential
#
So people who are worried about that kind of concentration of power or interest group
#
capture might prefer a parliamentary system, right?
#
Some people believe in a parliamentary system, there's too much churn, there's too much
#
log ruling because there's no, it doesn't produce like a clear victor, right?
#
So people who are worried about those concerns prefer a presidential system.
#
So it really depends on who are the people coming together to form the rules and what
#
are their end goals with respect to those rules.
#
The other part of it is what are the consequences of these rules, right?
#
And we've done a couple of episodes on this.
#
What are the consequences of, for instance, the eminent domain provision or the lack of
#
it in the current Indian constitution, right?
#
So when you have weak constitutional rules, how do individuals respond to that system
#
and what are the good or bad or terrible consequences that take place?
#
We did something similar on constitutionalizing caste, where we talked about what are the
#
incentives for people of all different castes to hold on to their caste identity or to let
#
it go in a market system vis-a-vis a reservation system.
#
So these are some basic things, I mean, these are some basic examples of work that can be
#
done in constitutional economics.
#
And what about public choice?
#
Public choice is much broader than this.
#
It is basically the analysis of political decision making.
#
So it's the economic analysis or the positive analysis of political decision making.
#
So we go back to the assumption that we were talking about a moment ago, which is we assume,
#
you know, about 50 years ago or 70 years ago in political theory, people would say the
#
executive branch believes this, the judicial branch believes this, right?
#
So it's done very much as if the judicial branch is like this, you know, vague structural
#
thing, which is a different entity, not exactly made up of individuals.
#
So the first thing public choice did is break it down to the individual decision making
#
So break it down to what are the incentives of a Supreme Court judge within the judicial
#
system, of a high court judge, of a judicial clerk, right?
#
So at each level, you can break it down to what are the incentives of the actors acting
#
The second part of it was in terms of political decision making, the attention shifted from
#
intentions to incentives, right?
#
So while we like to assume that everyone in office is very well meaning, what are actually
#
the incentives that these individuals confront in their daily work, right?
#
So you have written a fair bit about this, about how bureaucrats are really interested
#
in sort of protecting their turf and increasing their budgets and increasing their authority
#
within a system, right?
#
So Gordon Tullock's bureaucracy was a foundational work in this realm.
#
So these are sort of some of the things in public choice.
#
The other aspect of public choice is voting theory, right?
#
So earlier the idea was that people are self-interested when they go to buy apples or oranges.
#
But when they go to the voting booths, they suddenly become these very benevolent public
#
spirited creatures, right?
#
And public choice introduced the idea that that's not true.
#
You are the exact same individual who responds to incentives in the same way, whether you're
#
buying apples or whether you're going to vote in a voting booth, right?
#
And that springs up all sorts of issues, which are the incentives in the political decision
#
making framework as robust as the incentives within market decision making or within a
#
firm or within a family, right?
#
How do you think about voting identity within a collective, right?
#
How do you think about voting in a primary system versus the final system?
#
So just lots of voting theory questions were answered by public choice.
#
In India, the most relevant would be we have a system called the first pass the post, right?
#
So whoever crosses the finish line first gets the parliamentary seat or gets the any legislative
#
seat and that number need not be 51%.
#
So imagine a highly fractionalized constituency where you have about seven or eight main contenders.
#
We have a number of constituencies where the victor has received only about 25% of the
#
vote, sometimes 10% of the vote, right?
#
And this is 10% of the 46% who showed up to vote of the adult population, which is allowed
#
So really a fraction of the people can help someone win a parliamentary seat, right?
#
In the case of the UPA versus the NDA outcome of the last election, if you notice their
#
vote shares aren't that far apart, right?
#
But under the leadership of Rahul Gandhi, they barely got about 44 seats and NDA managed
#
to cross the finish line.
#
In fact, it's interesting that in the 2014 national elections, BJP got pretty much the
#
same vote share that they did in the subsequent Delhi election where they only got 8 or 9
#
So how much of a difference those dynamics make?
#
And much of this is about first past the post system.
#
It is about how the constituency lines are drawn, how population is changing, how identities
#
are changing because we vote very much along the lines of religious, linguistic caste identities
#
So there is just a tremendously rich literature in public choice talking about these questions
#
which people can write about with respect to India also.
#
And not enough people in India know about it or write about it.
#
And this is something I keep saying that, you know, public choice theory is not like
#
some arcane branch of economics, but it's something that should be essential knowledge
#
for every Indian because at its core it's, you know, economics at its core is a study
#
And what public choice theory teaches you is that government is not some mythical benevolent
#
beast that we have built up which, you know, acts in a particular way, but it's composed
#
of individuals at various different levels who have various different kinds of incentives
#
available to them and they act according to those incentives, which is why, as I like
#
to say, not every politician is a bad person, but it is safe to assume that every politician
#
is corrupt because power corrupts.
#
But that's a subject for another episode entirely.
#
And in fact, we should do an episode on public choice sometime.
#
But let's get to the subject at hand, which is GST.
#
Now I've done two episodes on GST before this, one with Devangshu Dutta, one with my frequent
#
guest and our mutual friend Vivek Kol.
#
With Devangshu, I've done an episode before GST where he kind of spoke about how the concept
#
of GST is great, but he is worried that the implementation will be flawed in exactly the
#
ways that it turned out to be, you know, too many categories and too many exemptions.
#
And instead of being a good and simple tax, it's just one mindlessly complex beast that
#
might even make things worse.
#
And Vivek pointed out concrete examples of some of this, for example, bringing up the
#
point of whether KitKat is a chocolate or a biscuit.
#
And when you have so many categories and exemptions, you just raise the cost of doing business
#
instead of bringing it down.
#
You might reduce friction in some areas, such as, you know, different interstate taxes when
#
a good crosses borders or whatever, but you actually increase the complexities in some
#
And the reason I asked you to come on the show and talk about GST is that you did this
#
excellent column from Mint called Simple Rules for a Complex World, which borrows this title
#
from a book by Richard Epstein, which you refer to.
#
And I wanted you to elaborate on that a little bit because that really lays bare very well
#
what some of the problems with our current GST are.
#
OK, so I'll start with the idea of the title and then expand on to GST.
#
So Richard Epstein's book, and he gets his intuition originally from Frederick Hayek,
#
is that as the level of complexity increases in society and the economy, what we actually
#
need are simpler rules to help us navigate through the very complex choices.
#
So there are two ways people think about something they think as the level of complexity increases,
#
they should have more rules, more regulations, more sub-regulations that adapt to that very
#
specific situation and so on and so forth.
#
And Richard Epstein following Hayek said, not really.
#
Actually because the level of complexity in the economy is so high, it is almost impossible
#
to make rules for that level of complexity.
#
So what we end up doing is somewhat, you know, some mid-level of complexity of regulation,
#
which really hampers individual behavior, sets up more incentives, makes it very difficult
#
to comply with that regulatory framework.
#
So what we need is very, very simple, bright-lined rules, which are easy to understand, easy
#
to navigate, easy to resolve disputes over so that people can actually go about spending
#
their time navigating the wonderful, complex economy and the world we live in.
#
So that's the idea of the book.
#
Now coming to GST, I really enjoyed the episodes by Devang Shu and Irek.
#
And I think my intuition about how GST has played out is very much in line with theirs.
#
So just to give our readers some background, GST was supposed to be, I mean, when it was
#
originally announced, they said, you know, one country, one tax, right?
#
And the reason that was the idea was India is a federal system, every state and union
#
territory had its own set of state taxes across different kinds of goods and services.
#
And one major problem in India was when you had interstate trade, that is, you know, if
#
you wanted to sell something that was produced in Maharashtra and take it to Gujarat and
#
sell it there, you would get stopped at all these different check posts, right?
#
And the purpose of these check posts was to pay for the differential in taxes between
#
So the idea was we unify the entire country under one tax system.
#
And this way you have far better seamless movement of goods and services.
#
So in that sense, this idea was just a fantastic idea, because, you know, you've written about
#
this and many people have done studies on, you know, it takes 45 days to cross from West
#
Bengal to Gujarat in a truck full of, you know, goods, which basically means all your
#
perishables are destroyed, which means farmers can never really get a single unified market
#
and actually get a better price for their goods.
#
So there were a lot of problems for the regular guy.
#
In fact, as an as an if I may interject, there's a funny illustration of which this which comes
#
to mind, which I think Mihir Sharma mentioned in his book Restart, which is I forget the
#
But if you want to shift goods from Madras to Bangalore, Chennai to Bangalore or Chennai
#
to Hyderabad, I forget which exact cities there are two of those three, then it's cheaper
#
to do it via Paris indirectly.
#
And you know, and that's mind boggling, it is mind boggling because basically what that
#
means is either the checkpoint is placing a very high compliance cost or the differential
#
rates are so high, you'd rather go abroad, pay customs duty and bring it in because one
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of the ports functions better.
#
It's more a function of the delays plus the bribes.
#
So now here there is, you know, I mean, Mihir makes very, very clever points.
#
And I don't know if he was hinting at this kind of regulatory arbitrage, which is, you
#
know, it's easier to bribe the customs official, they're cheaper than the guy at the interstate
#
But you're absolutely right.
#
I mean, these are the sorts of problems.
#
And now imagine this not for, you know, a move between two cities is a one time thing.
#
Maybe you move once a decade, right?
#
You're talking about this happening for farmers, for small manufacturers on a daily level,
#
Imagine what a pain in the ass it is for people who are producing perishables, for people
#
who are in dairy business, right?
#
If you can't get your goods across the border quickly.
#
So basically India was a highly fragmented market.
#
So you know, kudos to the various governments in the past who tried to do this and to this
#
government, which finally managed to execute it.
#
And in all fairness, the moment the GST was announced, you know, about 20 states or 22
#
states immediately lifted their border checkpoints, which was quite a remarkable result.
#
And I'm not saying corruption went away overnight, but I'm saying a system that had so many problems,
#
it could be solved with this one shot tax system, which is quite fascinating.
#
Now having said that, the beauty of a GST system lies not just in its ability to unify
#
a territory under one umbrella, but also the way we would judge any other tax system, which
#
is, you know, is it simple?
#
And on these margins, as you have discussed with Vivek and as Didi's intuition was correct,
#
the GST fails quite badly.
#
So just to give you a sense of what is happening today with the GST, India has five different
#
GST rates, 0 percent, 5 percent, 12 percent, 18 percent and 28 percent.
#
And that is just big categories.
#
Now in addition to those rates, you can have a cess.
#
So we have a cess on entertainment.
#
We have a cess on luxury goods in some states.
#
We have a cess on petrol and diesel in addition to this GST rate that is imposed on them.
#
In addition to that, there are some goods which are getting special rates, hint hint
#
So India's taxed at 3 percent GST, precious gemstones at 0.25 percent GST.
#
So you have a system where even though it might be an improvement over the previous
#
system from a jurisdiction point of view, that is, you know, you unified the country
#
under one tax system, what you've essentially done is you have lots and lots of rates and
#
classifications and as would be the case in any tax system, which is moving from one kind
#
of tax system to another, there is a lot of confusion over what is the GST rate to be
#
levied on a particular good.
#
In fact, before you move on, I'll just put these five rates into perspective in your
#
article itself, which, by the way, for the benefit of the listeners will be linked at
#
the bottom of the podcast, according to your article, you cite the World Bank India Development
#
Update 2018 and you say that of the 115 countries with GST, 40 countries use a single rate,
#
just one tax instead of these five and 28 countries use two rates.
#
And we are in the company of Italy, Ghana, Pakistan and Luxembourg as the only countries
#
with four or more rates.
#
And you can imagine, I mean, other than Luxembourg, which can also be a regulatory nightmare,
#
I'm guessing you don't have very positive things to say about the economy of the other
#
So what we have chosen is in the spectrum of global GST frameworks, we have chosen the
#
Now, the defenders of the government say we didn't exactly choose it.
#
This is how, you know, this is how the chips landed because you had to make all these deals
#
and persuade all these different states to come under the umbrella.
#
And I can appreciate that there is a complex negotiation at play.
#
But having said that, the system we have today is just too complex.
#
So, you know, Vivek's example of the is KitKat a biscuit or a chocolate?
#
It sounds cute and funny.
#
But at the core of it, there's a really, really big problem, which is, let's say we figure
#
What about the next good and the next good after that?
#
So I had a few examples in the article, which is things like is Pepsi, Nimbus, pulp, right?
#
Or is it categorized, pulp is categorized at a different level, 12 percent from fruit
#
12 percent from fruit juice, which is categorized at a different level, 28 percent and there's
#
a big difference between 28 percent and 12 percent in terms of what a seller would want
#
Now, there are additional everyday problems related to this, which is things like every
#
So the assumption is normally we raise this dispute, the GST council announces the rate
#
and then magically that information is just transmitted to everyone and everyone knows
#
How many people are selling Pepsi in India?
#
What is their level of information about the tax system?
#
How many of them have the time to go to the GST council website every day to check the
#
So in the absence of this, what do they need to do?
#
They need to hire a lawyer or a chartered accountant who needs to go over every single
#
thing that they are selling or every single input that they are buying and help them work
#
That has become incredibly complex.
#
And you illustrated the complexity with one superb sentence in your piece, which I remember
#
Quote, one year into the GST regime, the HSN code book for GST classification contains
#
eighteen thousand three hundred and six entries and four hundred and thirty eight pages.
#
So I have to put this quote in perspective.
#
The HSN nomenclature is basically a nomenclature that has been used for a very long time in
#
India, both for, you know, all sorts of custom duties and tariffs.
#
And remember, every state was levying its own taxes.
#
So it's not like you didn't need a nomenclature before.
#
So we've always had one.
#
It used to be a six digit nomenclature for a very long time.
#
Now it's an eight digit one.
#
So the complexity and the subcategory problems have increased.
#
And some of this is introduced by the fact that, you know, earlier you had kind of learned
#
or figured out the state tax system.
#
And now most businessmen are learning a whole new tax system, which is never easy.
#
I have moved countries and I can tell you how painful it is to figure out the tax system
#
in each new jurisdiction.
#
So there is a painful transition process.
#
And having said all of that, imagine if you are just a regular kirana store owner, right,
#
who is selling, let's say somewhere between 75 to 100 different types of products, right.
#
You're selling everything from safety pins and chewing gums to Pepsi to bread to, you
#
know, your typical small kirana shop.
#
This person, in addition to running a kirana shop, which is not exactly easy anywhere in
#
India, has to figure out the correct rate for each of these things and has to backwards
#
and forwards comply and has to file taxes every month.
#
And the inevitable consequence of this is that he becomes a hostage to the inspector
#
So either you're hostage to Inspector Raj or you're hostage to the CAA Lawyer Masiya.
#
Which the kirana guy probably can't afford.
#
So, I mean, there you go.
#
Which the kirana guy either can't afford or, you know, you get a cheaper version or someone
#
in the family helps you out, but basically it's like hiring one more person full-time
#
for a kirana shop guy just to figure out and, you know, I mean, you live in Bombay, you've
#
been to these kirana stores, right.
#
Let's assume the proprietor is well-educated and understand the GST has figured out, sat
#
with his chartered accountant and figured this out.
#
That young boy who works there, who's 18, 19 years old and is barely literate, he also
#
needs to know what is the correct tax to levy, right.
#
So now imagine next time a kirana shop owner wants to employ someone, he can't just employ
#
some unskilled fellow, right.
#
He needs to now have a higher level of education and skill to hand out, you know, Pepsi and
#
bread because now there's a GST compliance issue and customers ask.
#
I have, you know, eaten at restaurants where my dad has actually asked people, what is
#
Why are we being taxed at this rate?
#
People ask when they get a receipt and they can't understand it.
#
And they absolutely should ask.
#
So this is something that people, I think people do understand because the average person
#
is navigating this problem every day.
#
The average businessman is really getting battered by this kind of information and compliance
#
But I think this idea is now only slowly penetrating to the governance system.
#
I think now people who are administering the GST system, they have begun to understand
#
that this is a big problem.
#
Now let me tell you a couple of smaller things which seem small but are very important.
#
So you know, one example was a skit cat, a biscuit or a skit cat, a chocolate, right.
#
Now here is an example that actually went to the GST council for clarification.
#
Now most offices have some kind of a food canteen or cafeteria, right.
#
If you run a canteen, it is taxed at 5%.
#
If you are using an outdoor caterer, it is 18%.
#
The problem is almost all the offices have a canteen, but the catering is done by a third
#
Very few offices actually cook their own meal in-house, right.
#
So this question actually went up to the GST council.
#
Did we tax at 5% or 18%?
#
Now multiply this, right.
#
Multiply this across all the categories, all that the GST council is doing is releasing
#
a new notification every day on what is the correct classification.
#
And now multiply this across and you have a notification nightmare, right.
#
So this is rule by notification.
#
Every day some new bit of information has to come out and everyone has to know where
#
to look for that information and then adjust and pay that particular rate.
#
So this has become a very big problem.
#
Now there is a third part.
#
Now let's say the GST council says the correct rate is 5%, not 18% or 18%, not 5%.
#
If someone disagrees with the classification, you take it to court, right.
#
And 13% difference in tax rate can mean a lot of money for some firms.
#
So it's valuable for them to have a resolution to this question in the long run to save that
#
Now you take it to a tax tribunal or worse to the high court and Supreme Court and you
#
basically burden the judicial system by adding a whole set of disputes which shouldn't exist
#
in the first place, right.
#
And for these reasons, I think the best way to go is to have a single rate.
#
40 countries have a single rate.
#
About 28 additional countries have two rates which also work pretty well.
#
So I think the first thing we need to do is, like I said, simple rules for a complex world,
#
just collapse all these different rates to one single GST rate, right.
#
And for very basic goods for poor people, you can just say it's a zero rate.
#
There is no GST levied on this.
#
Everyone else will have a single GST rate that needs to be paid and I think that's the
#
best way to go forward.
#
One GST rate to rule them all.
#
On that note, we'll take a quick break and when we come back, I want to raise a couple
#
of the standard objections that people have to this one simple rate and we'll continue
#
A quick break coming up.
#
So it's been another great week at IVM Podcast and if you aren't following us on social media,
#
please make sure you do.
#
We're IVM Podcast on Twitter, Facebook, Instagram, all the major social media networks.
#
This week on the Prakriti Podcast, Pawan and Humsani talk to economist Anupam Manor about
#
how India is tackling creating new jobs.
#
On the Puliyabazi show, tune in to part two of Pranay's interview with China expert Manoj
#
On Simplified in a Shorty, Shriket, Chuck and Naren give interesting tidbits about the
#
qualifying round of the 2018 World Cup.
#
On Cyrus Says This Week, Cyrus has a conversation with friend of the network Vivek Kaul about
#
On Who's Your Mommy, Veda and her friends discuss the strange and disturbing questions
#
they've been asked by their kids.
#
On Keeping It Queer, Naveen talks to non-binary Instagram sensation Diane Ribello.
#
On Vartava App last week, Akash and Naveen exchange some hilarious stories with Balraj
#
Ghai, owner of the Hotel Intercontinental and The Habitat.
#
And with that, let me get you onto your shows.
#
Welcome back to The Scene in the Unseen.
#
I am talking with Shruti Rajgopalan and she's just finished making a case for why we need
#
simple rules for complex problems and our GST is mindlessly complicated instead of being
#
the good and simple tax that it was hyped up to be.
#
And Shruti, before I continue and I want to raise a couple of the standard objections
#
people make to that, but before that, I just want to try and summarize your position and
#
tell me if I missed anything.
#
Your position basically is that the complexity of the GST where you have so many different
#
rates for so many different categories has the impact that compliance costs go up.
#
Compliance becomes extremely difficult and a lot of human labor of people in businesses
#
and goes into figuring it out or you hire CAs which is a cost in itself and what this
#
can do at the margins is that it can drive some businesses out of business entirely and
#
in other cases, it will just raise the cost of those businesses, therefore raising the
#
cost for consumers as well and therefore ending in what seems to be like a vicious circle
#
or a negative sum game or whichever way you put it and to stop this negative ripple effect
#
where everybody suffers except for chartered accountants and lawyers.
#
What you propose is that make it a good and simple tax, have one tax rate for everything,
#
perhaps for certain goods have no tax rate at all which are essential items for poor
#
people but otherwise just have one tax rate.
#
Have I summed it up correctly?
#
Absolutely and I just want to add one slightly broader point than the GST.
#
We talked a lot about classification, right?
#
There are two ways to solve the classification nightmare.
#
One is that the government just needs to classify things better, announce it better and have
#
some mechanism by which people get this information quickly so the compliance costs are reduced.
#
That is one way of thinking and there is a lot of focus on trying to make the government
#
The other way of thinking is the way you and I have been talking about which is let's eliminate
#
the need for a complex classification system in the first place, right?
#
So if you collapse it to a single rate, everyone needs to pay the same rate, there is no need
#
for classification, you kill the complexity automatically.
#
Right, so now the two sort of objections I want to raise are to be clear not my objections,
#
I am entirely on board with you, but these are objections that came up on Twitter after
#
your excellent piece kind of went viral in a small way and I want to give you a chance
#
to address these points that were made.
#
One point is that having multiple rates of GST is really not fair or progressive simply
#
because to have the same rate for a small kirana store for small goods is not as you
#
would for say a guy who is buying a BMW is not fair, why shouldn't the guy buying the
#
Well, so there are two parts to any kind of tax burden, one is actually the tax rate that
#
is levied on the good, right, which is the 5% that you have for certain goods in a kirana
#
store versus 28% for luxury items and things like that.
#
The second part of the tax burden is the compliance and if you really think about it, the kirana
#
store guy has a greater compliance burden when there are lots of classifications versus
#
the guy who is buying the BMW because he can probably afford a lawyer and a chartered accountant,
#
he probably has a few, same with this BMW showroom, they probably have an army of people
#
helping them manage the regulatory and the compliance requirements, whereas the small
#
kirana store guy now has this additional burden, so what people are missing when they talk
#
about progressive tax rates or a fair tax rate for people who are using, you know, people
#
of a certain income class who are selling or consuming certain products versus people
#
consuming luxury products is the classification system imposes an enormous compliance burden,
#
which by the way doesn't fall equally on everyone, it falls at a much greater proportion
#
to the turnover on the little guy, right.
#
So the point you're making is actually the other way around, it's a little guy who would
#
benefit from a simple tax.
#
So if you ask people, I mean, there are two demands being made, one that the tax rates
#
are too high and the second that it's too complex, virtually everyone is on board with
#
simplifying the tax system, including the little guy, then you can talk about, you know,
#
when you have a single rate, I think it's very important to have a debate about what
#
that single rate should be, right, and I think the lower the better.
#
So Singapore has a 7% GST, Australia has a 10% GST, we have some of the highest GST rates
#
So ours need not be 7 or 10%, right, we need we need revenues to come in.
#
So there is an argument to be made there that maybe that single rate can be a little bit
#
It's not in single digits.
#
Maybe it's in the low to mid teens.
#
But this this argument that, you know, the Kirana guy is being treated unfairly because
#
by collapsing to a single rate, my answer is just the Kirana guy is being treated unfairly
#
when you have multiplication of classification and complexity in rates also.
#
So I don't think you're helping that.
#
I mean, the compliance costs are hitting the poorer, the much more and therefore you want
#
to reduce the compliance costs and what the single rate should be is not an argument you're
#
You're just saying that there should be a single rate.
#
And you know, there are many ways to figure out what that single rate should be depending
#
You know, you can have good projections for what that single rate will get you in terms
#
If people stop spending money on chartered accountants and lawyers and approaching the
#
GST Council and tax tribunals, right, that money can either go towards business or it
#
can go towards the higher tax rate.
#
A penny saved is a penny earned.
#
So if you save money on compliance, you can raise it either as revenue or it can go back
#
in the economy through productive businesses.
#
And the government therefore makes the same amount of money, if not more, either by the
#
money saved on compliance coming back as higher taxes or preferably going back into the economy
#
and just increasing the tax base and there being more business to be.
#
And I think there is a very important argument to be made that I didn't make this argument
#
in the column, but right now a number of items are excluded from GST, right.
#
Most important being real estate and alcohol.
#
So I think it's very, very important to broaden the GST base and include all goods and services.
#
That is going to result in a much higher, much better tax collection, as well as a much
#
simpler and fairer, you know, tax system across the board for everyone, minimizing all this
#
kind of regulatory arbitrage that people engage in when it comes to real estate and things
#
So I think a better argument to make when it comes to raising revenue and being fair,
#
you know, to the poorer groups in the economy is that you need to expand the tax base, not
#
necessarily have multiple tax systems.
#
Let's, let's move on now to the second objection, which is the objection of revenue neutrality,
#
which basically let me try to first sum up what the objection is and you can tell me
#
if I've summed it up correctly and then you can continue addressing it.
#
Revenue neutrality basically means is that look, we move from one system to another system
#
from a hazard, different taxes across states and so on to one GST with all these rates
#
and exemptions, which applies to the whole country.
#
And at one level, revenue neutrality states that you achieve revenue neutrality when you
#
get in as much money in this new system, that is the government takes in as much money in
#
this new system as they were getting before GST.
#
And at another level, when you talk of revenue neutrality, it is a guarantee given by governments
#
to states that the amount of revenue you guys make under GST that goes to you will be the
#
same as you were making before GST, which is a guarantee they had to give to get the
#
states to agree to GST in the first place.
#
And the objection that therefore people are raising is that if you have just one rate
#
for everything, instead of these different rates, won't that affect revenue neutrality?
#
Have I summed that up correctly?
#
I couldn't have said it better.
#
So Amit, you're absolutely right.
#
There is a huge question of revenue neutrality.
#
This has been something that's been looming large at the macro level since the inception
#
Like until you implement a new tax system, you don't know how much revenue it's going
#
And there was a really big fear that the already depleting coffers of many of the Indian states
#
will deplete further because they agreed to this unified tax system.
#
Now there is some good news on that end, right?
#
So Arvind Subramaniam, our current economic advisor, our current outgoing economic advisor,
#
just recently wrote a piece based on nine months of revenue collections.
#
So until April this year, right?
#
On how in the first nine months, some months you've had a decrease in revenue collections
#
versus the same time last year, some months there has been an increase.
#
But overall for the nine months, there has actually been an increase in revenue collections,
#
So this is something that is quite remarkable and something unexpected.
#
So there is actually a revenue growth of 11.9% compared to the pre GST numbers.
#
And this basically means he's made a great argument that there is a tax buoyancy of 1.2.
#
So tax buoyancy is the responsiveness of tax growth to nominal GDP growth.
#
So as the GDP grows, how much does your tax revenue grow?
#
So that number is called tax buoyancy, that's 1.2%.
#
So the chief economic advisor has actually given us some good news, like we can really
#
breathe a little more comfortably now that we are not just revenue neutral in the first
#
nine months, actually revenue plus.
#
So that's one aspect, right?
#
So in that sense, the GST has been a success in that our revenue collection system didn't
#
just completely collapse when we shipped it from system one to system two.
#
The second part of the revenue collection is most of the states are not doing as badly,
#
the ones that were expected to do badly, are not doing as badly in revenue collection as
#
was originally anticipated.
#
So Arvind Subramaniam says that the payout that the central government will have to make
#
to the states is much smaller than what was feared or anticipated before.
#
So in one sense, even the current extremely complex system we have seen as revenue neutral.
#
Now coming to the original question that you asked, revenue neutrality is not determined
#
by how many different rates you have, it is determined by what is the revenue collection.
#
So you can have revenue neutral, revenue plus or revenue minus depending on what the rate
#
So let's say the single tax rate is 2%, right, and it's levied on everything.
#
It's possible that at such a low tax rate, you are not revenue neutral, your revenue
#
But let's say the single tax rate is 18%.
#
It is wholly possible that even under that single rate, you are revenue plus as opposed
#
to being revenue neutral.
#
So the idea of revenue neutrality is the total of how much revenue you collect.
#
Now that is obviously determined by your tax rate, right?
#
There is something in economics, there's a Laffer curve, right, as tax rates increase,
#
first the revenue collection goes up, then it goes down.
#
So you want to figure out where India is on this curve.
#
With some goods, you're going to win some, with some goods, you're going to lose some.
#
So you know, there are some goods like say tobacco, which are highly non-responsive to
#
increases in tax, right?
#
So in those cases, a high tax rate will actually get you more revenue.
#
On things like onions, you're going to lose if you impose a very high rate on it.
#
The revenue is actually going to go down.
#
So you're going to win some, you're going to lose some with a single tax rate.
#
But on the whole, it is wholly possible that if you have one single rate and you find the
#
correct rate, you are not just revenue neutral, but you are revenue plus.
#
So to sum it up, your point is that as far as revenue neutrality is concerned, it won't
#
be affected necessarily by merely simplifying the GST and having one tax.
#
What will affect is what that one tax is.
#
And that is a separate argument that you're not getting into now.
#
You're not saying whether that one tax should be 18 or two, you're just saying we should
#
have one tax and remove those compliance costs.
#
And then let us talk about what that one number should be.
#
And we can fix it at something that gives us confidence that revenue neutrality at least
#
And you know, if you think about it, you know, all of us can appreciate that the government
#
is trying to do something quite extraordinary in terms of scale, right?
#
So there's going to be some trial and error in the system.
#
I think we all can agree to that.
#
So it is possible that you start with a rate and like Goldilocks, you need to move higher
#
I don't think that's a very big problem.
#
But remember, that is going to be a trial and error with only one rate, right, which
#
You know, you open the first page of the newspaper, it says GST council has increased the rate
#
And that's all you need to know, right?
#
So even that trial and error process, if we if we can see that that's going to happen,
#
The other part of it is a lot of the revenue neutrality arguments are also dependent on
#
And we don't see enough writing on that in the current GST framework that we actually
#
need to expand the base.
#
We need to cover everything.
#
We need to stop exempting things like gold and gemstones that ridiculously low rates,
#
So gold is taxed at 3% gemstones, diamonds are taxed at 0.25%.
#
So we're making, you know, all this crazy exemption.
#
So there's a really important question of eliminating all these exemptions and increasing
#
the tax base to things like alcohol and property taxes, and then simplifying down to one tax
#
And I don't think there is a very big problem of revenue neutrality.
#
I think long run India will generate more revenue under a system like that.
#
And in fact, just to go back to public choice, which we mentioned at the start of this episode,
#
what typically happens when you have so many exemptions and so much discretion to people
#
and authority is that you will have all these interest groups coming up and there is scope
#
for corruption, which is almost inevitable, I would say.
#
And you'll have your gemstone lobby and your alcohol lobby and all these different lobbyings.
#
And then it just becomes that same old interplay between power and money.
#
I think you and I could come up with very good ideas on why we have so many exemptions,
#
knowing all the public choice literature that we know.
#
I think another question is how do they persuade all these different groups to come under one
#
And I think we are very well poised in this moment.
#
You know, normally for someone like you and me who are strong believers in federalism,
#
it's quite frightening to have single party rule in so many states, right?
#
Just from a point of view of concentration of power, it doesn't matter which party it
#
Especially given that we have a fairly weak constitution in some ways.
#
And so right now we are in a very interesting moment, which has happened, you know, after
#
the great Nehruvian times, which is 21 states are under one party rule.
#
So there is some case to be made that if there is anyone who can unify all these different
#
interests and bring them under one umbrella and persuade them, it is the current ruling
#
party and the current prime minister.
#
I don't think that would be an unfair thing to say.
#
So we are in a good, I mean, there are many bad things that come from concentration of
#
power, but it also provides an opportunity to overcome all this kind of interest group
#
So I would really, I would hope that the current government capitalizes on that moment and
#
actually does that for the GST.
#
So I'm actually for the rest of this episode, I'm going to ask you only questions related
#
to public choice theory, because I want to explore the sort of political economy of why
#
the GST is what it is and how it can be reformed.
#
What are the sort of incentives in play which could prompt people in power to make that
#
move towards a single tax rate?
#
And what are the kind of incentives in play which could make those in power resist such
#
So I'll give you a couple of examples.
#
Right now, I think there is a very unified lobby, you know, even if you break down the
#
different goods and services in the economy to different lobbies, I think they're all
#
asking for exemptions and special privileges and things like that.
#
But I think there is a lot of unity in that everyone wants this to be a simpler system.
#
Because once everybody can benefit, like normally what happens is that the benefits are concentrated
#
and the costs are dispersed.
#
So in terms of compliance and complexity, I think there is a lot of unity.
#
Virtually every industry lobby that has been coming to both the GST Council and the government
#
have been persuading the government to create a simpler system.
#
And both Mr. Jaitley and, you know, the current economic adviser, Mr. Subramaniam, they have
#
all talked about how there is going to be some discussion and move towards simplifying
#
the current GST tax rate system.
#
To get it down to fewer rates, eliminate some of the exemptions.
#
So I think this is very much on everyone's mind because all the industry lobbies have
#
been talking about this.
#
What could mitigate that?
#
So what can mitigate that is some lobbies actually become strong.
#
Like we've seen a very strong Gujarat lobby that has ended up with ridiculously low rates
#
for gold and gemstones.
#
So what they say is, OK, don't give us a simple rate, just give us a special rate.
#
It's going to be too difficult to unify everyone and bring it under one tax rate and compliance
#
Give us a little special treatment, we are special to you.
#
That is sort of the attitude.
#
And we have seen that happening.
#
Basically, industries which don't have much power or much lobbying capacity at the state
#
and federal level, especially entertainment, right, different states put all kinds of stresses
#
It's very difficult for them to lobby or like spend money on lobbying instead of spending
#
money on making movies or making music.
#
On the other hand, tobacco, alcohol, you know, some of these lobbies are just very well organized.
#
So they will be very good at getting their special rates.
#
And to neutralize the effect of the special rates, some goods which are used by everyone
#
which are not well organized are going to have this cess and that cess in addition to
#
the highest 28 percent GST.
#
So this is this is a problem of special interests and in the short run, special interests trying
#
to capture whatever gains there are when there is a lot of confusion and transition in a
#
And what is your sense of which side is stronger?
#
You know, is it likely that we will simplify to the extent you want or because typically
#
what happens in government is that regulation only gets deeper and more complex because
#
of all the interest groups and the incentives involved.
#
It rarely gets simpler.
#
But you know, there is a huge incentive in this case, right, if things get more complex
#
and we go back to our good old system of Parchi, you know, there is a so you can't put India
#
doesn't have the state capacity to throw everyone in jail if they wait tax.
#
If you have a highly complex system and very high tax rates, what's going to happen?
#
People will just stop paying.
#
Then it's more beneficial.
#
You know, I recently last time I was in India, I went with my mom to our tailor.
#
She has two sets of books.
#
The other one is all Parchi start to finish Parchi.
#
So all her inputs, people give her Parchi and then she gives us a Parchi, right?
#
So what is going to happen is if the compliance requirements are too high or if the tax rates
#
are too high, people will just start evading and when people evade tax, no matter how beautiful
#
your GST system is, the government doesn't have revenue.
#
So I think one major fear for the current government and any future government is we
#
can't mess up the system so much that there is a genuine loss in revenue.
#
I think there is some push towards simplifying the system to increase revenue.
#
And remember, the more revenue you have, the greater power you have as a ruling party.
#
So out of sheer self-interest, the evil force will be prompted to do a good thing.
#
Or not do a terribly bad thing.
#
I was being tongue in cheek there and I'm going to twist your words out of context because
#
What Shruti has just called for is civil disobedience on a mass scale.
#
Don't pay your taxes until the GST gets reformed.
#
I won't even ask you if that's a fair summary or not because it obviously is.
#
And on that happy note, Shruti, thanks so much.
#
I think no, it's not a fair summary, but I will say I think all forms of protests are
#
No, but I think people can protest by saying we refuse to file, do what it is you wish
#
because your system's really terrible.
#
We have fantastic history in India of objecting to unfair taxes, starting with the salt tax.
#
That is a civil disobedience movement.
#
So I can very much get behind kirana shops who say this is just too complicated.
#
You have got to simplify this, otherwise by all means, you know, shut our shops and throw
#
I think I would in fact call for that.
#
I would love if we could organize like that.
#
What I keep reminding people is that the salt tax that Gandhi protested was a fraction of
#
what the salt tax is today.
#
So you know, where is our resistance to oppression?
#
But on that note, Shruti, I mean, I learned a lot in this episode and it's definitely
#
taken us forward from the last two episodes, which I would nevertheless urge the listeners
#
So thanks a lot for coming on the show.
#
I had a really good time.
#
If you enjoyed listening to this episode, head on over to scene unseen dot IN, which
#
has all the archives of the scene and the unseen, including many episodes with Shruti.
#
You can follow Shruti on Twitter at S Raj Gopalan.
#
You can follow me at Amit Verma, A-M-I-T-V-A-R-M-A.
#
Thank you for listening.
#
He bends down to test the warm water for his bath.
#
He comes here to quench his thirst for a hot shower and some podcasts.
#
You can witness how he enjoys having other people talk about cool stuff in his bathroom.
#
Indeed, it helps him with his loneliness.
#
You can find more of his species on IVM Podcast dot com, your one stop destination where you
#
can check out the coolest Indian podcasts.
