Arvind Subramanian Talks To Prannoy Roy: Full Transcript

Chief Economic Adviser Arvind Subramanian talks to NDTV's Prannoy Roy about how the Goods and Services Tax will impact our lives.

Following is the full transcript of the interview:

NDTV: Hello and welcome. Are we about to see one of the biggest changes in our economy for many, many years or is it all hype and no substance? What's the big deal about those three letters, GST, the Goods and Services Tax? Sounds a bit boring but let me tell you it's not. It's going to change our lives in many ways. So will we have to pay more or will we have to pay less when we buy things after the GST comes in? Will things become more expensive? Will they be cheaper? What is GST anyway? And why do economists believe that India must, must have GST now if we're going to grow faster and improve the way our entire economy works? Well, GST is big, big news right now. You've seen the scenes from Parliament, actually you don't want to see those scenes from Parliament, don't watch television during the day and the huge effort that everyone is making to put aside other differences, just for a moment and at least pass the GST. I would say for God's sake pass the GST. The country needs it. It's also in the news because the Chief Economic Advisor of India has just come out with a comprehensive report on GST. What the plans are, what it's going to do, its intricacies and a good summary up front for those who don't want to do too much bedtime reading. So this report adds a huge amount to the transparency and the goals of GST. And we have the author of the report with us here right now, Arvind Subramanian. Thank you so much for joining us. There's also, I must say an elephant in the room, which we will come to later, but first I've got to ask you, you write in the report that a hundred and sixty countries have implemented an equivalent of GST or something like that. How ambitious is it for India and how different is it from these other 160 countries?

Arvind Subramanian: In my view the Indian GST is going to be quite special and uniquely ambitious in many ways. So 160 countries have what's called a Value Added Tax, which is what a GST is, but implementing this in large federal systems is really the real complication. And because the problem is that when you have a federal system, you have a central authority that wants to levy the tax, you want regional authorities, the Central government, the State government, everyone wants to do this and then...

NDTV: I don't envy you.

Arvind Subramanian: Exactly. And then in this so everyone wants autonomy to set these rates. But if everyone does what he or she wants, at the different levels you get all these distortions, you know, movements of goods becomes very difficult. So to get a system, a clean system in a large country like India, where you reconcile all these different objectives, is actually very difficult. And what India is planning will make it actually, in my view, the 21st century standard for how to do these things in a large federal system.

NDTV: That is phenomenal. We've heard about the benefits of the common market in Europe, so to some extent this is a step in a common market.

Arvind Subramanian: Absolutely, very much a step, absolutely. Because you know there are lots of taxes affecting the movement of goods between states and the GST will, you know if the GST gets done we'll eliminate most of those and we'll clean up many of them, so that, you know, many taxes are rolled into just one tax.

NDTV: Currently it is a mess. It's a mess and to change a mess with a messy social structure, messy political structure you're trying the impossible.

Arvind Subramanian: And Prannoy that raises a very important point, is that I think we as a nation should actually take a lot of credit for where we are on the GST and hopefully it'll get done, because as you said it's very messy politically right, and yet there's something quite unique about this GST. First, it's been bi-partisan. You know it was started under the first NDA regime and I think the next UPA regime they shepherded this through and now this government has you know brought it to the brink.

NDTV: So it's gone through different governments.

Arvind Subramanian: Yes, different governments and it's all been you know thought about, designed, crafted across the spectrum, one, and second I think it's a fantastic example of corporate federalism. Because here you have the Centre and 29 states, 2 Union Territories, they all come together and say 'let's do this together'. And to actually, you know, to kind of, you know, the way I think about it is that in a sense all these people are coming together and they're not giving up their sovereignty but they're pooling sovereignty for a larger cause that is India.

NDTV: Which is what we need and really worth fighting for but to actually buttress all that you're saying and to understand it, I also, I don't think too many people are experts on this. Just let's have a look at the main. What's the big deal about GST, what are the main factors? Will prices go up or down when GST comes in? That's what we all want to know and will the economy improve? Let's have a look at the main points. Well the first point is that there is no cascading of tax on tax. All taxes, Centre or State, almost all taxes Centre, State goods and services and that's a huge thing, can be set off, so if you're paying 10 per cent tax and then you charge 10per cent tax, you don't charge 10 per cent on 10 per cent and then the consumer has to pay tax on tax. No cascading of tax on tax, that's the first kind of technical point. The second point that we're talking about is there'll be less corruption. Now that is what every Indian wants because there is a mechanism of self-policing, as there's an incentive for every producer, seller, to get vouchers. At the moment to avoid getting vouchers helps you pay less tax. But they say if you want to pay less tax in the GST system, you have to get vouchers. So it's going to reduce corruption. Let's have a look at the third point and we're going to go into these each one of them in some detail, because this is the total extent of my knowledge, Arvind Subramanian, so you'll have to explain these a bit. It makes India one common market, that's something you were referring to just now. Things are going to be faster to process, not only that our trucks are going to go across borders faster, there will be other bottlenecks, but octroi will go, so those long embarrassing queues we see at every state border will be reduced. It's a smoother system and simpler to understand, and the myriad of taxes that we have right now. The third point, let's have a look; it makes India more competitive versus imports. That's a very important issue I want to discuss because we're losing out right now and we need to understand why this is makes India more competitive versus other countries. And then the fourth point, fifth point is it's a boost to India's growth rate. It'll give us a higher growth rate. Somebody mentioned it's going to increase our growth rate by 2 per cent. I think that's a bit much to forecast. But for example, investment will go up because under GST capital goods tax can also be set off. So people will invest more because they get set off against the machines they buy. And finally, and there are other areas we'll also touch on, if we look at the final point overall, okay if we look at the final point, how do all these come together in increasing or reducing prices, but first of all, very quickly, don't dwell too much on the details, no cascading taxes, how does that help?

Arvind Subramanian: Yes as you said, very simply that, what happens is that if I produce something, I buy inputs. Inputs have taxes, you know you pay taxes on the inputs. So when I get it, I add value to it and then the taxes on my output. But my output already has taxes in the form of the inputs that I buy. So when I pay tax, it's a tax on what I produce and also tax on the inputs that have gone into my production, so that's what cascading is.

NDTV: It's senseless to have a tax on a tax.

Arvind Subramanian: And then what it does is that, as you said, it adds the cost to the consumer at the end of the chain. So what this is saying is that that amount which is, you know the taxes put on the input, you will not pay any tax on that and that's kind of flushed out of the system.

NDTV: So that really does simplify that. If I'm going to pay tax then I'm going to pay tax on what I've produced, not on what somebody else has produced, tax I've already paid on it, now is there going to be one tax rate, one GST?

Arvind Subramanian: So the way, I mean these are all decisions the GST council will have to make.

NDTV: But you kind of talk about 3 slabs, what are they?

Arvind Subramanian: So essentially; you know for example, some commodities are thought to be consumed by poorer people, thought to be socially very valuable and important.

NDTV: Like say medicine or something.

Arvind Subramanian: Yes, so medicine for example that will face a lower tax. So we've recommended in our report that that lower tax should be State and Centre combined 12 per cent. 6 plus 6, 12 per cent.

NDTV: So that's the lowest?

Arvind Subramanian: Yes, the lowest.

NDTV: What your recommendation is?

Arvind Subramanian: Yes. The second tax, which is what is applied to most goods, is called the standard rate and what we've recommended is that that it should be somewhere, you know 17, a little bit 17 or 17 plus.

NDTV: 17 per cent?

Arvind Subramanian: 17 per cent to 18 per cent is what our...

NDTV: 17 to 18. And this is the standard, which is about 65 per cent of all the goods and services that will be paid.

Arvind Subramanian: All the goods and services will be paid. Now the important thing is that when you say is it the same, there are many, many sames you know. One is, is it the same between goods and services and the answer is yes, it has to be and that's very important. Then you don't have to define what's a good, what's a service, so one rate and it just goes and that very important, very important. The other thing is whether the same rate has to apply at the Centre and the States? That's not necessarily the case because you know at the moment the States get more revenue from these GST taxes than the Centre does, so it's possible that the Centre will have to tax a slightly higher rate than the Centre.

NDTV: The State will have to.

Arvind Subramania: May have to charge.

NDTV: So they have a top up tax, is it?

Arvind Subramanian: No, no, no, this is just the same, like when we say 17 per cent for the standard rate it could be 8 by the Centre and 9 by the States, but that 9 for the States, it'll be the same for goods and services; that 8 for the Centre will be the same for goods and services.

NDTV: And then there is a top up.

Arvind Subramanian: There is a third rate for what we call luxury goods, you know and that I want to emphasize is that that rate...

NDTV: Don't you call them sin goods?

Arvind Subramanian: We call them demerit goods. Sin is getting a bit judgemental.

NDTV: A bit. I saw certain things; nimbu paani is in it, Scottish nimbu paani.

Arvind Subramanian: Yes. Scottish nimbu paani so I think we call them demerit goods and there is the rate...

NDTV: Like tobacco and stuff.

Arvind Subramanian: Tobacco.

NDTV: Cigarettes?

Arvind Subramanian: Tobacco, some cigarettes but also luxury cars and things like that. But there I must emphasize that whatever we're saying, the rate there is exactly what the current, we're not increasing those in any amount relative to the status quo.

NDTV: So three rates. One is the goods, which are for the poor, like medicines as well.

Arvind Subramanian: Clothing, food items. Because remember that, just to complicate matters there are also goods on which there will be no tax, they're called exempted goods, like food stuffs for example which the poor consume.

NDTV: So that's about 12 per cent and the standard rate 17 to 18, which is 65 per cent of the goods and then these horrible demerit sinful goods which are like alcohol and cigarettes and...

Arvind Subramanian: Alcohol is outside the scope of the GST.

NDTV: That's a State subject, right?

Arvind Subramanian: Right.

NDTV: Real sinful stuff is for the States. And petrol?

Arvind Subramanian: See, on petroleum the arrangement is that, under the current understanding, is that it will eventually become part of the GST, but in the initial stages, it's so, it's not constitutionally kept out of the GST, it's going to be in and at some stage, you know, Centre and State can get together and say 'now we bring it into the GST'.

NDTV: So it will come into the GST once there's an agreement on it. Why isn't it in right now? Bit disappointing that.

Arvind Subramanian: Well, that's all, this is, these are all political issues. I think compromises that were made you know, some States think that they get a lot of money out of this so they wanted to be outside.

NDTV: So if you've got petroleum in your state then forget the Centre, forget the government, I want my taxes from that petroleum.

Arvind Subramanian: Well that, I think, but you know everyone makes sacrifices and so everyone gets something in return. I think one should see this as a political bargain that's acceptable to everyone.

NDTV: So, that's the cascading effect and the simplification and the ease of doing business, based on the GST versus what the number of taxes we have right now. What about the second point that we raised, less corruption? That this is a self-policing as there's incentive to get vouchers and declare stuff? That seems to me very powerful.

Arvind Subramanian: Powerful, very powerful. I think you're absolutely right. You know I think the reason why world over we went into the Value Added Tax was perhaps this fantastic design feature. First you mentioned cascading, but in this that if you don't want to pay the tax on tax that means you have to get documentation from the guy who you bought it from. That guy says I paid these taxes. Then you can show you've got this bill, which shows the taxes and you can say, 'so I won't pay tax on tax'. So there's an incentive, as you said very nicely earlier, if you don't want to pay tax on tax, to ask the guy behind you, in the value added chain, to actually produce the documentation. Then he in turn has to, you know, and this is not just theoretical. There's a very nice piece of academic work done on Chile, where they actually found that this really does have a very big impact on compliance. That you know, the fact that you, so in a sense if everyone knows this is happening everyone knows that he'll be asked for this documentation, so then you have to maintain this documentation and so evasion becomes less and corruption becomes less.

NDTV: That really is a huge thing to voluntarily ask for a bit of documentation because it helps you. At the moment it harms you. Would it happen even at a shopkeeper level that when they're selling the goods they can also set off, so they won't avoid giving you a bill, etc?

Arvind Subramanian: At the final stage it becomes, it's a little bit different you know, because you're selling it to the consumer, so the consumer cannot ask for anything, but certainly at every stage, every guy who sells it and also up to that level.

NDTV: Now let's go on to the third key point that GST is going to kind of benefit us with. It makes India one common market. By that we mean things are going to be faster, they're going to be simpler, they're going to be smoother, how?
 
Arvind Subramanian: Yes, so I think you know the way we phrase it in the report, and it's something that I do want everyone to start using this phrase you know, we, the GST, can help Make in India by making One India, you know we want to create One India.

NDTV: So Make In India by making One India, because if you have many India's, it's tough to actually handle it and it's a disincentive.

Arvind Subramanian: And the way, let me say, give a couple of examples of how that happens. One is that you know, for example now there is a tax when you sell from one State to another. So if say Gujarat produces something and it sells it to, you know, another State there's an extra tax on that. Now think about it from the point of view, say you're in Tamil Nadu, right and this, you know, inputs and outputs come from different States and come to your State, it pays all these taxes, so someone buying this good in Tamil Nadu will have these extra taxes, if you have to buy this good from Gujarat there will be three, four, five percent more tax, which puts you at a disadvantage compared to buying ii from outside.

NDTV: From Singapore or Malaysia or anywhere.

Arvind Subramanian: So that's the sense in which by creating one market you say, well then it's as cheap in Tamil Nadu to buy it from Gujarat as it is from Tamil Nadu itself. That means it's cheaper to buy it from there than it is to buy it from somewhere else.

NDTV: Plus the complexities of having different rates, different things, you can't set them off, then there's all kinds of State taxes.

Arvind Subramanian: So that's you know, which leads to the other point is that when goods cross borders in India there are all these check posts and part of those relate to complying with taxes.

NDTV: Have you paid the tax? Let me see your documentation and corruption as well, actually...
 
Arvind Subramanian: Exactly, there's corruption, there's one estimate that something like 20 per cent of the delays that take place across borders are due to having to pay taxes, so if we can clean that up we get this big benefit. And remember, this seems like a slightly technical point to make, but you have to remember this, that in India many more goods go by road than by rail, many more, twice as much...

NDTV: Unlike other countries the rail is the main way but we've under invested in rail.

Arvind Subramanian: Exactly. We discuss this in the Economic Survey, but because of that, therefore if you have more regulatory delays related to taxes and one more thing, your connectivity within India is further undermined and compromised because of this specially because we do so much by roads...

NDTV: And it makes such a huge difference.

Arvind Subramanian: Yes, it makes a huge difference.

NDTV: I think in America things move three or four times faster on road, than in India, because of so many tolls at every border etc.

Arvind Subramanian: In fact there are some estimates that say that you know, the time and the cost of crossing state borders in India is like 6 to 7 times more than you know, in other countries, which are more efficient. So maybe we won't eliminate all differential, but just some chunk of that.

NDTV: I find that a huge thing to see these roads and lines of trucks on borders are so depressing in one country, one market. Let's have a look at the next two points. Actually we have covered those points already. Which makes India more competitive versus other countries inventions? State-to-State taxes that go up and where you get straight from other countries that don't pay that much, but finally boost to India's growth rate. How is that going to happen? Is that really going to happen?

Arvind Subramanian: See, I think as you said, a number of people have calculated the impact of the VAT. We haven't done any, you know, serious analysis on that, but one thing, one piece of information that did strike us, which we mentioned in the report, was something that you mentioned, that growth depends upon more investment. Investment basically means capital goods, when firms buy capital goods, that is what investment is. Now the beauty about this GST, VAT system is that part of the reduced taxes that you know, what you can set off your taxes against, is the taxes that you pay on the purchase of capital goods, right? Now under the current system too you can get some setoff on that but when you go to the GST you can get a huge setoff on that. So, effectively it is like making the price of capital goods cheaper when you get the GST.

NDTV: Because when you buy machines you can get setoff from the taxes that you pay on that machine. Another thing I don't know if you mentioned in the report, I haven't read every single page, but for the young Indian economy where startups are important, e-commerce is important, it seems like a dream for them. They are going to have one tax for the whole country; they don't have to keep worrying because there are so much logistics involved in e-commerce. So this could be a great help for boosting our whole e-commerce.

Arvind Subramanian: Yes. I think the whole simplification, uniformity, you know it is a point we did not mention when you asked how many rates are there going to be and I said just two or three. You have to compare that with the current system. At the Centre we levy 8 taxes, 8 rates on taxes and in addition we levy cesses and other types of taxes. So not to underestimate the simplification that's going to take place as well on this.

NDTV: I think that is a huge boost to the economy. So the elephant in the room, Chief Economic Advisor, are we going to pay more or less, are prices going to go up or down?

Arvind Subramanian: Luckily...

NDTV: Don't try to avoid it by giving me an economist answer.

Arvind Subramanian: No, not at all.

NDTV: Don't say it all depends.

Arvind Subramanian: No, not even all depends. Remember the task for our committee was to come up with what is the revenue neutral rate and by definition...

NDTV: Revenue neutral for the government?

Arvind Subramanian: Yes, and by definition it's revenue neutral if on average prices don't go up, because after all it's the extra price that leads to the tax. So in principle revenue neutrality, by definition we've got the numbers right, means that prices should not go up, taxes should not go up. But it's possible that even though on average prices don't go up there may be some shifts in, you know, some goods can go up and other goods can come down and so on. So we've done some actually very detailed analysis of the report on this, it turns out for example that in the CPI...

NDTV: That's the Consumer Price Index.

Arvind Subramanian: The consumer basket yes, about 50 to 55 per cent of goods even today are exempt from taxes and that will continue into the GST, so most goods, so what we calculated, is that virtually no increase in taxes, no major increases in taxes on nearly all items. It's possible for many items it'll come down; it is possible for a very few items it could go up marginally, but any increase will be very small.

NDTV: So revenue neutral GST, revenue neutral means that prices will not go up.

Arvind Subramanian: Exactly and that's very important.

NDTV: If I can push you a little further, if there are inefficiencies as a result, because things are simplified, can prices come down and still be revenue neutral?

Arvind Subramanian: Yes, in fact, I mean think about it this way, that in fact this is something we do calculate, we say that for example there will be some substantial compliance efficiency, i.e. that is that, you know, when taxes come down you get better compliance you know and that helps bring down overall rates. And if that happens you can also get some downward pressure as well

NDTV: So good chances that prices, inflation, may come down?

Arvind Subramanian: Yes, well at least it's safe to say that there shouldn't be, you know, any serious price impact at all.

NDTV: Well thank you very much. I think you're embarking on a terrifically tough exercise. But it's worth it?

Arvind Subramanian: It's more than worth it, just want to end on this note, if we're running out of time, because think of it this way, from the point of view of the overall reforms that you know the country needs, and the Government is embarking upon. A big part of investor complaints about India has been the tax system. Now in the next Budget we've kind of committed to bringing corporate taxes down, we're bringing exemptions down, exemptions are big source of again discretion, so on the corporate taxes we're doing that. Now with the GST, on the indirect taxes, also kind of cleaning up the system. So it's possible when the dust settles we have, really have a simple, cleaner, overall tax system, which has to be good for the economy.

NDTV: Thank you very much. Indeed, we have understood much more than all the reading that I've done, this was very clear. Thank you very much and let's hope GST does come in. Set aside your differences. Sit in Parliament for five minutes, pass the GST and maybe we will head towards a more corruption free and a more advance Indian economy. Thanks for watching.