The Strike of the Tax Cobra
There is diametric collinearity between humans and perishable commodities, both of them face an end, that is, both of them die. Ideas, on the other hand, are perennial. Of course with the advent of new ideas, the old ones may become obsolete, but they never die down, they’re there to stay.
A ton of macroeconomic growth theories are based on the foundation of ideas, economists like Solow and Romer are there to testify. One may think that all ideas come in the snap of a finger, like a light bulb over your head, capable of revolutionising, like some sort of a miracle, but that’s obviously not how it works in the real world. Because the real world is a lasagna of problems that exist in multiple layers. And no, they cannot be solved in a snap.
Hence, researchers and experts are perpetually working to give birth to or discover new ideas that help solve a pinch of the problems of this world we live in.
Economists too are constantly working with the government to roll out new policies and strategies each consecutive year that make the economy run efficiently and satisfactorily, like a butter knife spreading butter on a slice of bread. Except, policies do not always pan out the way they were expected to. And this isn't where I talk about the policies giving an alternate outcome of what was expected, but the entirely opposite outcome, which worsens the problem at hand.
This brings me to talk about ‘The Cobra Effect’, which in literal terms means a policy or a strategy, made for the greater good, that leafs to certain unforeseen post-implementation consequences that don't just make the policy or strategy redundant, but also backfire well enough to compel the government to not just repeal the said policy/strategy but also make another move in the positive direction, a well-analysed one keeping the after-effects of it in mind.
A simple example to illustrate the idea better could be none other than road safety in India. With the massive population of India and its mortality rate existing in a spectrum of causes, road accidents are a major one. Imagine a handful of sand and then imagine the rate at which it slips out of your clenched fists. That’s the rate at which people riding on two-wheelers and cars face road accidents in India. To prevent this, the government decided to roll out a rule that car drivers would be fined a penalty amount in case they are seen driving without a seatbelt. What did this do? This made the car drivers wear a seatbelt to prevent incurring the fine, but also made them counter-incentivised to now drive more recklessly thereby increasing their own risk to injury but also passersby’s and pedestrians’ risk to a road accident. Hence, this move didn’t just give an alternate outcome, but a diametrically opposite one to what was expected.
Digressing a little from the Cobra Effect, let us look at a topic that is very essentially affecting India as we speak, something that is also very politicised and very heavily debated upon across news platforms and social media, the ‘Goods and Services Tax’ or GST - a tax system formulated and applied and amended a total of 950 times, to aid the ease of doing business and to eliminate corruption by levying the tax on the value added to a good at every stage till it reaches the consumer. In a move to reduce costs incurred by producers and retailers by making far-reaching changes in the tax system, GST has surely brought about its own set of concerns, ones that are inherently opposed to its intended outcome.
To understand the negative implications of GST, let's look at a few reasons behind the recent protest by the Indian traders’ associations against it. Although we have been told our entire lives that making mistakes is okay, the same does not hold true when it comes to small businesses making mistakes while filing their returns. It is a huge irony to what some people, playing on the acronym, call it a 'Good and Simple Tax'. With the three categories under GST, namely - Central GST (CGST), State GST (SGST) and Inter-state GST (IGST), the government portal for GST allows no trading firm to review their purchase returns once filed.
In multiple instances, firms mistakenly enter the IGST returns under CGST and SGST, or vice versa, and the only mechanism that the government then provides is to either cease your Input Tax Credit (ITC) for that particular transaction by sending a mismatch notice or claim your mistakenly filed returns under “assessment” and not refund the excess amount. This has effected a blow on the export industry who was already badly affected by the e-way bill amendment to GST.
The e-way bill was introduced so goods can be transported inter-state with ease, except the reality is that its the most strenuous process for any business, considering the government’s mandates of filling in all details, including vehicle numbers, specific goods’ names, and so on, on the online portal post. Moreover, a truck carrying a consignment with an expired e-way bill or an erroneous e-way bill is penalised 200% of the tax value.
The space that GST has allowed for natural human errors or even software errors is extremely narrow. What is making things even more difficult for such traders is that the grunt of the glitches in the online GST portal is also faced by these traders, and not the government. This makes it legit for the traders’ body to then claim that GST is begetting 'tax terrorism' in India and giving arbitrary powers to the government.
The worst hit by the entire situation are the ones that GST claimed to make better off, the Small and Medium Enterprises (SME). The cost of purchasing the software and hiring tax professionals, like chartered accountants, has made these firms incur more operational and overhead costs than anticipated. Moreover, since the new rule is that all businesses with a turnover exceeding Rupees 20 lakhs need to pay GST, another rule for the SMEs dictates that business with a turnover of up to ₹7.5 million can opt for the composition scheme and pay only 1% tax on turnover in exchange of GST and enjoy lesser compliances. Sounds like a simple decision, doesn’t it? Except, it isn’t, since there is the catch to this - the businesses that opt for this will not be able to claim any Input Tax Credit (ITC), hence leaving these SMEs in a dilemma to choose between a deep-sea and a cliff.
All in all, my view is that GST most definitely has a Cobra Effect on the Indian economy as it fails to fulfil the one thing it promised - good governance and ease of doing business. Of course, there are ways to change that by listening to the genuine demands of traders, entrepreneurs and various other industries and making compliances in a manner that in order to eliminate a few bads, we do not end up destroying the innocents. Because all they have got as humans are their ideas and their perishables.
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