To most economic commentators, the year 2016 began as the 25th anniversary of the landmark 1991 reforms in India, reforms that marked a structural break from the past.
2016 has also been witness to some dramatic economic policy events.
The Goods and Services Tax (GST) legislation and currency demonetisation are the more significant policy changes that directly impact lives of almost every Indian. The ushering in of an inflation targeting regime for the Reserve Bank of India and the new Bankruptcy Act are as economically significant, if not as visibly impactful.
Will 2041 be similarly celebrated as the 25th anniversary of the ‘landmark 2016 reforms’?
While the jury may still be out on that, most seem to agree that 2016 can be remembered as the year of another structural break from the past. Alas, only deceivingly so.
Licence Raj Baggage Remains
Any dealer who profiteers in any scheduled article by selling it at a rate higher than the one fixed shall be punishable with rigorous imprisonment.West Bengal Anti-Profiteering Act, 1958
Any dealer that sells a good or service at a price that is not commensurate with a reduction in the tax rate can be penalised by an Authority.Model GST Law, 2016 (Paraphrased)
While it may be tempting to celebrate 2016 as the year of a structural break from the past, the Model GST Law is a sobering reminder of how Indian economic policy making continues to function with suspicious undertones of business and markets, even after six decades.
The Model GST Law proposes to set up an authority that will be tasked to ensure that any reduction in GST rates is adequately passed on to end-consumers.
In other words, the government is apprehensive that businesses will price their goods and services higher than what they think it should be, and the government wants powers to regulate that. How exactly will this new authority determine price reduction commensurate with lower GST rate is unclear. But it is very clear that there will be an authority and it will have powers to wield.
Even as the 2016 GST legislation aims to rationalise hundreds of tax rates across various goods and services into a simplified five rate structure to ease business regulations, it will also set up a new authority to indirectly regulate prices of goods and services, as West Bengal did in 1958!
To be sure, India is not the only country to dream up this sort of legislation. Malaysia enacted an Anti-Profiteering and Price Control Law in 2011 ahead of transitioning to a GST regime. Various reports suggest that this law has interfered with the smooth functioning of markets in Malaysia and has been counter-productive.
Ideally, competitive market forces should ensure immediate pass-through of any lower GST rates to end consumers. It is also true that there can be market failures that result in anti-competitive, anti-consumer pricing through cartelisation. But it is not obvious that a new authority set up by the GST Council is the solution to prevent such market failures.
There is already an established Competition Commission of India (CCI) and a consumer grievance process in India.
GST or otherwise, there can be price hoarding by businesses which needs to be dealt with appropriately. Rather than set up a new authority, the GST Law can confer referral powers to the GST Council to refer suspicious cases of anti-competitive activities to the Competition Commission, if needed.
The very premise of GST is not just simplified tax rates but also tax administration. The GST Council is currently agonising over who will have the rights to administer GST - the centre or the state - so as to present just one interface to the taxpayer.
Black Money Redux
It is ironic that this proposal for a new authority in the Model GST Law comes at a time when there is a rallying war cry against ‘black money’ in the country. It is not hard to imagine how officers of this new authority can raise arbitrary objections to what they deem is a ‘fair’ price of a certain good or service after a GST reduction, and threaten to levy penalties which can then be amicably settled with the taxpayer through a payoff.
Just as the nation seems to be revelling in punishing hoarders of illicit wealth accumulated in the past, the GST Law creates a new opening to generate more illicit wealth in the future.
For all the loud rhetoric and chest thumping over demonetisation and its objectives, there is a complete disdain to eradicating the roots of India’s black money problem - such as creating more anti-business regulatory authorities. Sixty years since the West Bengal Anti-Profiteering Act, we have one more in the works.
As an aside, West Bengal was the 2nd richest of all large states of India in per capita GDP terms in 1960, ahead of states like Gujarat and Tamil Nadu. In 2016, it is the fifth poorest, far below Gujarat and Tamil Nadu.
Praveen Chakravarty is a Senior Fellow at IDFC Institute, a Mumbai based think/do tank. His work focuses on financial sector legislation & political economy. Noise to Signal will bring you insights from that.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.