Hasmukh Adhia

Mr Adhia, GST Needs “Complete Overhauling”, “Some Rejig” Just Won’t Help

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Yesterday evening, the social media was abuzz with a statement that Hasmukh Adhia, the revenue secretary, had given in an interview to the Press Trust of India (PTI) regarding the Goods and Services Tax (GST). As he said: “There is a complete overhauling that is required… it is possible that some items in the same chapter are divided.”

The website of The Hindu still has this report. You can also read it on Scroll.in.
This statement was later changed to: “There is need for some rejig in rates… it is possible that some items in the same chapter are divided.” The interview on the PTI website, currently has this statement and not the earlier one.

The phrase complete overhauling [of GST] has been replaced by some rejig in [GST] rates, by the PTI. Of course, a complete overhauling is majorly different from some rejig, but this is the closest that someone senior in the Modi government has publicly admitted that the implementation of the GST has been a disaster.

There are questions that need to be asked, even though the chances of getting any answers from the Modi government, remain nil.

1) Why was the government in such a hurry to launch the GST, when it was clearly not ready for it. This lack of preparation was already visible even before GST became the order of the day.

As Navin Kumar, the chairman of the GST network, in an interview published on June 27, 2017, told Business Standard: “It should be a stable system. Problems that surfaced during the first phase of the testing have been resolved. We did the testing on the basis of the rules that came in December. After that, some changes were made to the rules. Those changes we have absorbed now, so there is no time to do beta testing for that.”

Here is the Chairman of the network on which the GST is implemented saying that they haven’t had the time to test it properly. What more evidence is needed for the system not being completely ready?

Bharat Goenka, the managing director of Tally Solutions, one of the companies which has made a software for customers to help them file the GST returns, made a similar

In an interview with the Business Standard published on June 23, 2017, he was asked: “Is the problem essentially with the cramped timeline? Is July 1 too optimistic?” He answered: “It is indeed very cramped. While it is easy to add a new feature to software with respect to its functioning, developing robust software takes time. Whenever you make a change, you need to harden the software and that takes time. If you do not give it time, you end up with fragile software and get potentially surprising results. It is a high-risk environment. So, it is not sensible to try and do such mega rollouts without robust backing.”

Obviously, the government was in a hurry to launch the GST without adequate preparation. In the process, it ended up creating the mess that currently prevails. And given that concerns were raised by people who were part of the process of the launch, this is clearly not benefit of hindsight.

2) Nearly four months after the launch, a lot of confusion prevails on many fronts. Even the chartered accountants lack clarity on issues. This tells us again that there wasn’t enough communication from the government on this front. In countries where GST (or value added tax as it is more popularly called) has been successfully implemented, an adequate amount of time is spent in training those who will be a part of the system implementing the GST (both inside and outside the government). This, has clearly not happened in India.

3) In fact, much before the GST was launched, analysts had pointed out that there were way too many GST rates, and that made the entire system fairly complicated, for those who need to follow the system.

The examples are now out.  A newreport in The Times of India quotes a supermarket chain owner as saying: “Tax on snacks like aloo bhujia, potato chips, samosa, kachori is 12%. Now the tax rate for cashews is 5%, but I can’t figure out if masala cashew is a snack or a standalone item.”

Similar issues have cropped up when it comes to sweets. Milk sweets come under the 5 per cent bracket, but the moment a silver foil is put on it, tax shoots up to 18 per cent. As Congress leader Veerapa Moily put it: “For example, is Kitkat a chocolate or a biscuit? Is coconut oil considered as hair oil or cooking oil?”

A ministry of finance press release towards the end of September 2017 pointed out: “The total number of tax payers who were required to file monthly returns for August 2017 is 68.20 lakhs, of which, as on 25th September, 2017, 37.63 lakh GSTR 3B returns have been filed.” Around 55 per cent of those who needed to file GST returns, actually filed it.

Given the way, in which the system has been designed, this isn’t surprising at all. What this has also brought out is the fact that Indian traders are digitally challenged, and it will take time for them to catch up to GST. Meanwhile, the economy will have to suffer because of this.

4) The multiplicity of tax rates has led to a situation where the tax rates on different products make very little sense.  While the GST on condoms is 0 per cent, that on sanitary napkins is 12 per cent. One explanation provided for this is that only branded sanitary napkins invite a GST. But why even make this distinction? Does the GST apply only on branded condoms? Or more importantly, is there anything like an unbranded condom? These issues will simply not arise if there were fewer rates of tax.

Another explanation provided is that the mandate of the GST Council which decided on the GST rates, was fitment of taxes i.e. the GST rate on a product must be close to the existing taxes on it.

This is a rather silly observation given the status of the GST Council. If the idea was mere fitment any junior level bureaucrat could have done it. The fact that GST Council comprised of the finance ministers of all states and the finance minister of the central government, means that such anomalies could have been easily corrected.

There are several such inconsistencies, for the lack of a better word. The GST on environmentally friendly hybrid cars as well as fossil fuel guzzling SUVs is the same at 43 per cent (28 per cent GST and 15 per cent surcharge). Before GST became the order of the day, the total taxes on SUVs added to around 50 per cent.[i] In case of hybrids the tax before GST was around 29 per cent.[ii] This has led to the companies increasing the prices of the hybrid models of their cars.

And there is more. The GST rates on diamonds and gold are at 0.25 per cent and 3 per cent respectively. But the GST on something as useful as matchboxes (handmade ones) is 5 per cent. Why is this the case? Is it because those who run diamond and gold firms have deeper pockets funding political parties, than those running firms making matchboxes?

5) The rate of tax for most services has gone up from 12.36 per cent in 2014 and 15 per cent till June 30, 2017, to 18 per cent under GST. Of course, a part of this jump was supposed to be neutralised because of the input tax credit available under GST. But anecdotal evidence clearly suggests that the price of services has gone up because of GST. The government needs to study this and if this is true, it needs to cut the rate of tax on services to 15 per cent.

6) Also, the Modi government has tried to implement a convoluted and a complicated GST, which has “privatised compliance”. This has hit the small and medium enterprises(SMEs) the hardest. This also shows that we haven’t really learnt the lessons from our past.

One reason for India’s big black economy has been the high income tax rates over the years. In the early 1970s, the highest marginal rate of tax was as high as 97 per cent. Of course, at such a high rate most people who should have been paying income tax, did not. Not surprising, why would anyone give away Rs 97 out of every Rs 100 that he earned over a certain level, to the government.

The point being that tax compliance is always better at lower rates. At 28 per cent and higher, the peak Indian GST rate is among the highest in the world. Hopefully, as the number of tax rates under GST gets slashed in the years to come, the higher rates will go.

To conclude, GST has hit the small and medium enterprises (SMEs), which were already reeling under the negative impacts of demonetisation very hard. This is something that needs to be corrected very quickly, simply because it is the SMEs which create jobs in any growing economy. As finance minister Arun Jaitley recently told ET Now: “Bulk of the jobs in India are created by SMEs, by the micro industries, by self employment. Gone are the days where only the government sector created jobs in the government or the organised sector created jobs.”

And given that one million Indian youth are entering the workforce every month, the country needs SMEs to create jobs more than it ever did before. Given this, the GST needs complete overhauling, in order make it simple and uncomplicated. A simple rejig won’t do. Hope Mr Adhia and his boss in the finance ministry are listening.

[i] A.Modi, Planning to buy a luxury car or an SUV? GST may save you up to Rs 85,000, http://www.business-standard.com, May 21, 2017.

[ii] A. Khan, Hybrid Cars May Become A Thing Of The Past Because Of GST, www.businessworld.in, July 4, 2017.

The column originally appeared in the Huffington Post on October 23, 2017.

Modi Should Close Loophole Allowing Political Parties to Launder Black Money

 

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On December 16, 2016, the revenue secretary Hasmukh Adhia said that the political parties are free to deposit old Rs 500 and Rs 1,000 notes in their bank accounts. Adhia also said that deposits in the accounts of political parties are not to be taxed. “If it is a deposit in the account of a political party, they are exempt. But if it is deposited in individual’s account then that information will come into our radar,” he said. This basically meant that deposits made by political parties would not be up for scrutiny.

This statement created a lot of controversy. The finance minister and master spinner Arun Jaitley then took pains to explain that the political parties were not being given any favourable treatment. As he said: “Under Section 13A of IT Act 1961, Political parties have to submit audited accounts, income and expenditure details and balance sheets. Post demonetisation, no political party can accept donations in 500 and 1000 rupee notes since they were rendered illegal tenders. Any party doing so would be in violation of law.”

“Just like anyone else, political parties can also deposit their cash held in the old currency in banks till the 30th of December provided they can satisfactorily explain the source of income and their books of accounts reflect the entries prior to 8 November,” he added.

While it may sound different, both Adhia and Jaitley were essentially saying the same thing. This is how things prevail as of now. Political parties are currently not required to publicly disclose contributions of up to Rs 20,000.

As Sandip Sukhtankar and Milan Vaishnav write in a research paper titled Corruption in India: Bridging Research Evidence and Policy Options: “This rule allows contributors to package unlimited political contributions just below this threshold value completely free of disclosure.”

This basically means that any political party having received individual donations of up to Rs 20,000 in cash can deposit it in bank accounts. This money will not be investigated simply because these donations need not be publicly disclosed. That is the law of the land. And that is precisely what Adhia said: “If it is a deposit in the account of a political party, they are exempt. But if it is deposited in individual’s account then that information will come into our radar.”

Further, the political parties can go through the audits that Jaitley talks about but they still won’t have to publicly declare the names of the individuals and institutions, who have donated amounts below Rs 20,000.

In fact, let’s look at some data from 2014-2015, put together by the Association for Democratic Reforms. As the report titled Analysis of Income & Expenditure of National Political Parties for FY- 2014-2015 and dated June 3, 2016, points out: “Only 49% of the total donations of the parties came from voluntary contributions above Rs 20,000.” This means that 51 per cent or more than half of the total donations of National Political Parties came from donors whose details are not available in the public domain. The BJP, Congress, BSP, NCP, CPI and CPM, form the six national level political parties.

As the report points out: “A total of Rs 648.66 crores (51% of total donations) of the total donations to National Parties was collected during FY 2014-15 from donors whose details are not available in the public domain.”

The report makes several other interesting points:

a) BJP… collected Rs 434.67 crores (50% of total donations) from donors whose details are unavailable.

b) BSP claims not having received any donation above Rs 20,000, hence no donations details of the party are in public domain. The BSP has been declaring this for 10 years now.

c) NCP is only party which has not received donation below Rs 20,000 during FY 2014-15. Thus all voluntary contributions are available in the public domain.

d) As far as the Congress is concerned, 32 per cent of the donations of the party came from unknown sources.

e) The unknown sources of income are essentially raised through ‘sale of coupons’, ‘relief fund’, ‘miscellaneous income’, ‘voluntary contributions’, ‘contribution from meetings/ morchas’ etc.

So as far as dealing in cash is concerned, it continues to be the order of the day for political parties. It is worth mentioning here that we are talking about only six national level political parties here.

The number of political parties operating in India is significantly more. A PTI report dated August 2015 points out: “According to the [Election] Commission, as on July 24, there are 1866 political parties which are registered with it.”

Most of these parties do not fight elections. Then why are they set up in the first place? As former Chief Election Commissioner TS Krishna Murthy recently told The Indian Express: “Many political parties are set up with the sole intention of laundering black money.”

In fact, it is safe to speculate that many of these political parties would have been laundering money in the aftermath of demonetisation as well. The law of the land does not stop them from doing that. All they need to claim while depositing demonetised Rs 500 and Rs 1,000 notes into a bank is that it was donated on or before November 8, 2016.

Having said that, it would be make tremendous sense for the government to release data on the total amount of demonetised Rs 500 and Rs 1,000 notes deposited by the political parties in banks since November 8, 2016. Is the Modi government up for that?

Further, yesterday the Reserve Bank of India (RBI) came up with another rule. An individual while depositing more than Rs 5,000 must offer an explanation to at least two bank employees as to why this could not be deposited earlier. The amount will be credited only after receiving a satisfactory explanation. The RBI wants the explanation to be kept on record to facilitate an audit trail at a later stage. Also, the citizens need to show an identity proof while depositing their old Rs 500 and Rs 1,000 notes into a bank account. On the other hand, political parties can continue to receive donations of up to Rs 20,000 in cash and need not declare who gave those donations. The political parties can deposit the old Rs 500 and Rs 1,000 notes into their bank accounts, and no questions will be asked.

In fact, as I have been saying repeatedly, the issue of black money cannot be tackled seriously, without making political funding transparent. This needs simple majority in the Parliament. The BJP has a majority in the Lok Sabha and can take the first step towards this. It is likely to be supported by some parties in the Rajya Sabha as well. Even without a majority, the party did manage to get the Goods and Services Tax passed through the Rajya Sabha. So, what is holding it back on this front?

In fact, the Election Commission has suggested that “anonymous contributions above or equal to the amount of Rs two thousand should be prohibited.” But why even allow a window of Rs 2,000? Political parties should move towards a totally cashless way of taking donations.

To conclude what are Jaitley, Narendra Modi and the BJP, doing about taking care of this anomaly? An anomaly which as of now clearly allows political parties to launder black money. Will something be done on this front or are only the citizens of this country accepted to show all the honesty?

Postscript: This is my last piece for the year. Here is wishing the readers a Merry Christmas and a Happy New Year. See you in January 2017.

The column originally appeared on Equitymaster.com on December 20,2016

Here is More Evidence on India’s Love for Black Money

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In the budget speech made on February 28, 2013, the then finance minister P Chidambaram had said: “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.”

This statement caused a lot of hungama at that point of time. Recently, the revenue secretary Hasmukh Adhia made a similar sort of statement. “There are only 1.5 lakh individuals whose total income would be above Rs 50 lakh,” Adhia recently remarked.

This statement by Adhia has been largely ignored. It essentially implies two things: a) India is a poor country where very few people actually earn more than Rs 50 lakh. b) Very few Indians actually pay income tax and black money forms a major part of the Indian economy. Black money is money which has been earned, but on which tax has not been paid. While, there is no denying that India is a poor country, in this context the second option makes more sense.

In a country of close to 125 crore people, only 1.5 lakh individuals, or 0.012% of the population has an income of over Rs 50 lakh. This is a tad difficult to believe. The consumption patterns clearly prove otherwise.

One argument that can be made here is that many people earning over Rs 50 lakh are making money in forms that are tax-free, like capital gains and dividends from stocks. Dividend earned from stocks has been tax-free for a while now. In the budget presented in February earlier this year, the finance minister Arun Jaitley introduced a “tax at the rate of 10% of gross amount of dividend…payable by the recipients, that is, individuals, HUFs and firms receiving dividend in excess of Rs 10 lakh per annum.” (HUFs = Hindu Undivided Families).

While Chidambaram had used the phrase “taxable income”, Adhia just used the term “income”. So in Chidambaram’s case it is clear he meant that only 42,800 Indians had a taxable income of more than Rs 1 crore. Hence, there are more than 42,800 Indians making more than Rs 1 crore per year. This would include those who make money through capital gains and dividends from stocks, on which taxes need not be paid.

In Adhia’s case, he has just used the term “income”. Hence, the 1.5 lakh individuals who make more than Rs 50 lakh per year, would also include those who make money in forms, on which income tax does not have to be paid. It also includes those who make more than Rs 50 lakh per year, but whose taxable income is less than Rs 50 lakh, given that they make use of various deductions that are available.

Adhia’s statement was made in a certain context. In a notification put out on April 1, 2016, the ministry of finance had said: “With Assessment Year 2016-17, individuals and HUFs filing their returns of income in ITR-1, ITR-2, ITR-2A and ITR-4S, having income exceeding Rs.50 lakh will now be required to furnish information regarding assets and liabilities in Schedule-AL of the relevant ITR form.”

Basically those earning more than Rs 50 lakh would now have to declare their assets (cars, investments, property etc.) as well as liabilities (like loans being re-paid) while filing their income tax returns.

There were some protests against this move, which led Adhia to state that: “There are only 1.5 lakh individuals whose total income would be above Rs 50 lakh. This schedule in ITR only applies to ultra rich and will not affect the common man… 99.5 per cent taxpayers are not affected by this requirement. Only the ultra rich will have to give this information in their I-T Returns.”

On the face of it, this seems like another move on the part of the Narendra Modi government to crackdown on black money. While this might look like another move to tackle black money, to me it seems more like a classic bureaucratic exercise to harass those who are already paying income tax and following the law of the land.

The number 1.5 lakh is anyway so small that this lot of people is probably not in a position to hide its income given that most of it is tax deducted at source(TDS). Chances are that these individuals are either salaried and/or honest.

Hence, what is the point in making their income tax filings more complicated than it currently is? Is the chartered accountant(CA) lobby at work? Is it trying to ensure that filing income tax returns gets more complicated by the year, leading to more CAs being able to charge more?

I really don’t have answers for that. But in a country where conspiracy theories thrive, this one makes immense sense.

Also, from April 1, 2016, onwards, many high value transactions are to be reported to the income tax department.

These include: a) buying or selling of immovable property worth more than Rs 30 lakh. b) purchase of shares worth more than Rs 1 lakh or mutual funds worth more than Rs 2 lakh. c) payment of credit card bills more than Rs 2 lakh. d) investment of more than Rs 1 lakh in gold ETFs. e) investment of Rs 5 lakh or more in debentures or bonds of a company. f) cash deposit of more than Rs 10 lakh made into a savings bank account.

Hence, the government will have access to most of the information that it now wants from those earning more than Rs 50 lakh to declare in their income tax returns. Why is it still asking for this information? One possible explanation is that given the slow pace at which our bureaucracy works, the expectation is that this information will not be shared with the income tax department at a fast pace or on a regular basis. Hence, the department now wants the information coming to it directly. Again, I don’t have any evidence for this, but it makes for a good conspiracy theory.

Also, the moot question is what is the government doing to expand the tax base? Is it looking at the right places for people and institutions which are avoiding to pay income tax? Take the recent data on money supply released by the Reserve Bank of India.

Between March 2015 and March 2016, the currency with the public went up by 15% or Rs 2.08 lakh crore. Between March 2014 and March 2015, the jump had been 10.6% or Rs 1.33 lakh crore. So why this sudden jump?

The RBI governor Raghuram Rajan explained this in an interaction with the media after presenting the first monetary policy statement for this financial year on April 5. He explained that assembly elections are currently on in several states. Around this time, the cash in hands of the public increases.

As Rajan said: “you can guess as to reasons why…we also guess.” This increase is not only in the states that go to elections but also in neighbouring states. Having said that, this explains only a part of the increase.

This money that has gone out of the banking system to finance elections, is very easy to track. The income tax department can easily check if tax has been paid on this income. Typically, black money finances elections. But given that this money is financing assembly elections, and politicians are involved, the chances of anything like this happening are remote.

The column originally appeared on Vivek Kaul’s  Diary on April 7, 2016