Why Jaitley’s GST fails the ‘birthday cake’ test

It’s a measure of how simple — or complex — a tax proposal is. The allusion is to a political anecdote from Australia in 1993, when that country was debating a Goods and Services Tax (GST), much like the one that comes into force in India this week.

In the months leading up to that election, the opposition Liberal Party, led by economist John Hewson, was tipped to displace the ruling Australian Labour Party. The coalition headed by Hewson’s party campaigned on a tax-reform platform, which also envisaged a GST, a proposal the Labour Party opposed. But barely 10 days before the election, the ‘birthday cake’ episode unfolded, and proved a game-changer.

On a live television interview, Hewson was asked a simple question: “If I buy a birthday cake from a cake shop and GST is in place, do I pay more or less for that birthday cake?” Hewson’s muddled response (of which there’s a YouTube video well worth watching!) was that it depended on whether the cake would be decorated, have candles on it, and so on. To viewers and voters, that rambling answer, which Hewson defended even 13 years later as factually correct, exemplified the GST’s complexity. Analysts reckon that the response cost his party the election.

…is, for all its claims to being a simplified tax measure that establishes an ‘Indian Common Market’, a hideously complex, hopelessly tangled web of irrational fitments and mindless exemptions that are a lawyer’s and chartered accountant’s delight.

True. When Canada introduced a GST in 1991, three of its provinces sued the federal government over it. Even today, Canada has three separate GST models that operate simultaneously.

I’m not discounting the enormity of forging a political consensus in a country as large, as diverse, and as fractious as India. But given that the debate has been on for over 15 years, the extent of uncertainty over fitments and the mechanisms for securing tax credits and refunds and the inadequacy of the technology infrastructure even days ahead of the GST launch could prove disruptive for the economy, given India’s supply-side constraints.

Not really. In the same way that corrupt entrenchments in the banking system made a monkey of the demonetisation exercise, the GST framework is susceptible to abuse, and will almost certainly stoke inflation, which will neutralise whatever goodwill the GST measure in itself may warrant. As the French monarch Louis XIV’s Finance Minister famously said: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the least possible amount of hissing.” The hissy-fit that the GST proposal has induced all around is a testament to its failings.

It probably does, but going by what we’ve seen, the Modi government is given to flying blind on policy initiatives, hustling them through solely on the strength of a “something-will-turn-up” optimism worthy of a Wilkins Micawber. There’s also a touch of hubris in Arun Jaitley’s impatience with GST’s critics. It reminds one of another French monarch’s cavalier “Let them eat cake” mindset. In this case, it’s presumably birthday cake.

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