Automobiles, Hawai Chappals, Wheelchairs And All Things Complicated

It needs to be stated at the outset that what is called the goods and services tax (GST) is based entirely on the system of value-added tax (VAT). There are reasons to use this particular term in India, which need not concern us here. However, even in countries where it is called VAT, the tax is not just on goods but also on trade and services.

The three essential benefits of GST have been stated in a September 2010 Organisation for Economic Co-operation and Development (OECD) paper by Alain Charlet and Jeffrey Owens as follows:

• The VAT raises revenue in a neutral and transparent manner. Some suggest that ‘‘a VAT is the most effective instrument for generating government revenue’’ and that ‘‘the marginal cost of raising funds for public purposes through VAT is generally lower than it would be if other taxes were employed.’’

• VAT is relatively secure from serious fraud in a domestic market. The tax relies on a staged collection mechanism in which successive taxpayers are entitled to deduct input tax on purchases and have to account for output tax on sales.

• According to independent studies, the implementation of a unique VAT rate should reduce business compliance costs by at least 20 per cent and up to 30 per cent, and this may increase growth by 0.1 per cent to 0.7 per cent.

The advantages, as above, can only be realised when the application of tax is done in the simple form that it is designed for. Simplicity ensures compliance and, along with severe penalties, will reduce the possibility of fraud to the minimum. Hence, the government machinery will have the resources to go after the evaders.

Why the system is complex

The complexity of the system as is being implemented is based on two primary factors. One is to achieve the social objective of equality, and the second is the lack of trust that the government exhibits vis-à-vis the citizens. The social objectives are stated in emotional terms, which touches the hearts of people and thus makes the mind accept it as valid. Lack of trust is a legacy of the colonial system and implemented in an independent country on the basis of socialism.

In justifying the multiplicity of tax rates, the Finance Minister wondered how an automobile and a Hawai chappal could be taxed at the same rate. The latter is in the basket of the purchase of a poor man, while the one who purchases a car can afford to bear a higher tax. This justification has been made very often in the past in many countries, and it does have a theoretical justification. What it does not consider is that tweaking a system has a problem of its own, and often what is good in theory turns out to be not so practical. Who is to define what is a necessity and what is a luxury? Also, what is considered to be a luxury today has often been found to be a necessity tomorrow.

At an aspirational level, a person who today can afford to buy only a Hawai chappal can well be a consumer for an automobile in a short period. We have so often come across stories of rags-to-riches, and a higher tax rate on a supposed luxury good may well make the poor person suppress his aspirations that can motivate him to work harder.

Wage Goods model

Here, let me briefly discuss the Wage Goods model proposed by professors C N Vakil and P R Brahmanand. This was postulated as something that needs to be done in addition to the Capital Goods model proposed by professor P C Mahalanobis.

In the Wage Goods model, it is proposed that serious effort should be made to provide goods, primarily of day-to-day necessities, which a person can buy through the wages he earns. The intention, to state what is obvious, was that the government should identify any hurdles that may come in the way of such goods reaching the wage-earner. Essentially, it is not just a production issue but also a supply-chain issue – that the producer easily reaches the consumer. Part of the supply-chain also deals with the wholesale and retail sector, and regulations should not come in the way of the players here to function efficiently.

I would like to extend the Wage Goods model also as a means to incentivise the wage-earner to take extra efforts to increase his wages. Suppose the wage-earner has a desire to buy a certain product and can afford to buy it if the price is Rs 40,000. However, suppose the producer needs a price of Rs 60,000 to make normal profits, then the wage-earner may say that he can make the extra effort to earn the additional Rs 20,000, benefiting the economy to this extent.

Another scenario is that the producer says that he needs a price of Rs 80,000. The wage-earner may feel that the extra effort needed is not commensurate with the benefits of the purchase. And so he stays where he presently is, and the benefit to the economy does not accrue.

So, if the automobile becomes out of reach of the wage-earner due to the extra taxation, then the expected increase in the gross domestic product (GDP), as mentioned in the third point above, will not accrue.

Higher tax on ‘non-essential commodities’

Secondly, a lower tax on Hawai chappals also means that there would be a higher tax on a host of other products that the chappal-purchasing wage-earner would be buying. In which case the net benefit for a lower tax on the chappals is negated, and looking at chappals in isolation would mean missing the forest for the trees.

The emotional appeal of the Finance Minister’s statements has to be moderated with the reality, and recognising that the attempt to fine-tune could actually make things worse. It should also be remembered that the rich are also consumers of Hawai chappals, and thus they get an unintended benefit.


The emotionalisation is not restricted only to the political class. Some social activists also express their own agenda in a similar way. For example, it is said that taxing the wheelchair used by a physically handicapped person means that there is a tax on walking. Considering the need to tax the other day-to-day commodities that everyone buys, including the handicapped person, to be taxed higher to make up for the loss of revenue on wheelchairs, the net benefit to the handicapped person would be illusory. Also, the purchase of a wheelchair happens perhaps once every three to five years. Additionally, the other members of the family would be paying more for the products that have to be taxed higher.

An intrusive monitoring system

A multiplicity of tax rate necessitates the need to monitor the system in an intrusive way. Misclassifying the product to avail of a lower rate is an evasion of tax that would reduce the expected collection. Also, as has been seen in so many cases in the past, the maximum number of cases in the courts relate to classification disputes and not on the value of goods or services. Multiple rates lead to a lot of discretionary power in the government.

The cost of an intrusive system is an increased expenditure on bureaucracy as well as reduction in the ease of doing business. The former means the government needs higher revenue, and thus a higher tax rate. The latter means an increased cost of operation, pushing up the prices. The third benefit mentioned by Charlet and Owens will not be achieved. The supposed social objective of the multiple rates will be illusory.

On trust

The second basis for the complexity in the system is the lack of trust in the citizens of the country. While we lament that the British left us with a system of control, we forget that we had a choice of either continuing or dismantling it when we achieved our independence. Any coloniser has to, by definition, be very suspicious of those whom they are ruling because the ruled always aspire to remove the yoke of colonisation. We should also not forget that while the British applied a system of control on their colonies, they based the system in their own country on the basis of trust.

In this respect, I would like to quote a reply given by the second Sarsanghachalak of the Rashtriya Swayamsevak Sangh, Guruji Golvalkar, when he was asked: What happens if a particular farmer does not oblige? Secondly, if, as you said, there were to be free trade, where is the guarantee that the traders will distribute the food properly?

This was in the context of the serious shortage of food in India when there was talk about nationalising the food supply chain. The general charge was that the traders and the large farmers were withholding the produce from coming into the market to create a shortage when the fact was that there was a failure of crops.

Guruji Golvalkar on trust

The Sarsanghachalak first put the issue in the proper context when he said:


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