GST is directed at particularly benefiting the consumers and taxpayers: Arvind Virmani, President, Forum for Strategic Initiative
The whole point of this new bankruptcy law is that we get into this more conventional way of thinking: Arvind Virmani, President, Forum for Strategic Initiative
There is a lot of talk in the town about how GST would change the lives of the common people; give us your perspective on how you see this landmark reform changing India’s perception?
So at the broadest level the GST is directed at making the tax system; the indirect tax system simpler and easier for all stakeholders but particularly benefiting ultimately the consumers and the taxpayers who generate the revenues, but that is in the background given that we pass the amendment to the constitution etc. The best way to think of it is that if there were three stakeholders in the implementation of the GST- one is the state and central government who are interested in revenues, second the consumers who has right to buy these goods, and the third is the producers and sellers of these goods and services.
Now what has happened is that the focus of the transition has been on the first two factors which is to make the transition for consumers as simple as possible by not changing the tax rates on every single item too much and in some sense that has been part of the problem but let me give you the overview that the second part has been the states, each state wanted its own comfort level and that has been a major source of the problems actually which will arise which we can discuss subsequently is not only to preserve revenues but to do it in a manner as close to what they are used to do in today which is a bad idea actually but that is how the compromises were made and everybody got on board so that was a painful kind of cost we had to pay.
The third is the actual the producers and the sellers who in a way came third in this transitional phase and will have to be addressed perhaps six months from now, three months from now or over the rest of the year so the basic, the biggest pain is going to be in the is last category and the reasons etc. we can discuss as we go along.
What's your view on this new GST regime, will it be interconnected with the overall inflationary pressures and how the connection would really work?
The way when we calculate the tax rates really the best way to the objective is the revenue neutral tax and what that also means is that there should be no effect on inflation but of course it is not that simple so that is kind of the first order effect. The closer collection of revenues let us say over the next 12 months is to a revenue neutral rate the less effect there will be on inflation that is one element, the second we know very clearly is that within this overall system we are going to have a reduction relative reduction on the manufacturers or the good side and average rise on the services side.
So as far as the economy is concerned these things often play out over time so it is very hard to have the immediate impact in its essence but the third element is that our measures the CPI and other measures will actually capture the production of goods, the inflation coming there more accurately than the services so actually what you will see overall in the results which come out from the data is more likely to be a reduction in these inflation than a rise even if it is revenue neutral and even if actually there is a rise so the measured inflation is likely to fall. Overall I am reasonably confident that there will not be a net effect in actuality.
How would you respond to the mark down expectation in growth upside with the tweaked version of GST that will become reality next week?
If you go back a couple of years or at least a year at the time when the constitutional amendment was passed, people were talking about 1% to 2% which is basically what you said 1.5 or thereabout. But it was very clear that this is not going to happen instantaneous. So the question was over what time period would you see the gain that question remains but coming to your second aspect what is actually going to play out – in fact, though the kind of affects as I said that the third category on business there is going to be somewhat of a negative effect because there is going to be a lot of churning and one simple way in which I try to explain this is right now most product and services have the tax hidden inside the price and over the next three months these two are going to be completely separated out.
There will be entire chain which goes on the tax side and another chain on the price or cost side and that is going to be quite painful actually. It is going to be difficult except for the larger corporations which have automatic computer programmes which will make all these easy.
But for many others this is going to be a difficult process and over the next three, perhaps even six months for the smallest companies like the traders, etc, the retailers this will actually disrupt business to a certain extent and this relates to what I said the way the five rates and the reporting procedures have been done to basically make it easier for the consumers and the tax authorities actually has negative effect. So that in some sense takes away a lot of the positive effects at least for the next 6 to 12 months.
So what you are saying that in the next 12 months you will initially get a little bit of problem, I do not think it will be a serious effect on the production but the rest of the retail trade and other sectors kind of like the demonetisation, there will be some negative effects on those elements but then it will gradually recover over time. And so how quick the recovery happens towards the positive benefits coming through is a little difficult to predict but the numbers you have given of maybe between 0.2 and I would say between 0.2 and 0.5 you may see even during that the first 12 months.
There are still certain questions in the air with respect to destocking of old stock, the new inventory with the new MRP as well as some clarity on the input tax credit, your assessment of some of these questions and do you believe that there is still more clarity required on other issues?
See I think the key element which again I do not want to tom-tom but I said soon after the GST Bill was passed that the authorities must take a easy view of any errors and transgressions for at least six months and that I think is much more important because it is impossible to get it right for the smaller people.
You see the large companies I do not see a real problem because they have the people, they have the advisors, they have the programs they will get them and it is a just a matter of entry for them but many of the smallest people were not even in the system and it is going to be a learning curve for them and inevitably even the best, of course the who are not so good will make mistakes, some of them will even be deliberate but even the best are going to mistakes so the key element here is that there must not be a hard element on all these.
I think it is much more important for the long term that we get everybody into the GST net and not think that the purpose right now in the next six months is to catch every single evader, that will come eventually that will come from the system, that will come from incorporating these people. So the objective in the first six months should be just to facilitate as I said this third stakeholder which is the small companies, the SMEs, the traders etc into the system. So I hope that every state or at least the important states will have this attitude.
I think the central government from my personal experience of being there will have this attitude but the important thing is much of the action in terms of reporting and the problems of reporting are actually going to come from the state level reporting or the interstate transactions and so on. And I do very much hope that they will take a liberal view of even transgressions.
How do you look at the approach that has been taken towards resolving the bad loan problems, first short-listing it to 12 big bad accounts now saying look let us get the significant haircuts to get these bad loans sold?
You know globally say in the developed economies like US or western Europe what happens is that when there is a bankruptcy first the equity holders lose all their money so to say because equity value goes to zero and then the banks take a hit.
Now unfortunately the way our system has developed over the last 50 years these basic concepts of bankruptcy just disappeared and the courts used to take a very obstructionist, if I may call it that, process which would not allow these things to happen. So the whole point of this new bankruptcy law is that we get into this more conventional way of thinking which now fortunately even the legal system and the public is now clamouring for. So what this is doing is to make this happen for the public sector, for the private sector it will happen eventually but the public sector has the additional problem of having the CVC, the CAG etc who still do not understand this basic concept.
So what the government has done is itself rather than having it done over the next 10 years and having problems with the CVC etc it has identified 12 companies which are essentially bankrupt, that means the equity has zero value, plus the public sector banks involved will have to take a hit and these numbers really say is alerting the public that this is the inevitable result but it can only happen if the equity holders also suffer fully.
That is what happens globally. So what the government is doing is to take it in a way informational and knowledge process for the public, for the parliament etc I think it is the correct approach and I hope it succeeds and not again get stymied the vested interests which have been there for several decades.
So to repeat, whatever those numbers whether they are 40% or 60% this is inevitable. Once you
recognise that then you can even auction off these debts because the whole reason why the auctioning was not successful, it was already a part of the policy, was that people could not imagine that the value of these assets could be only 40% or even in some cases 10 or 20% and this is acting like an educational process which will ease this transition so to say.