Vol. XLI No. 28 July 09, 2017

The ‘Magic’ of GST

Surajit Mazumdar

MUCH hype has surrounded the transition to the Goods and Service Tax (GST regime) which has tended to be elevated to the status of being the magical solution to all of India’s economic problems. Nothing, however, could be further from the truth. Quite independent of the intrinsic merits or demerits of GST compared with the structure of taxes it has replaced, the changeover does not address the fundamental challenges of the Indian economy even in the sphere of taxation.

If at all GST is a reform, it is a reform of the indirect tax regime. If GST works towards increasing revenues of the central and state governments, and such a result is by no means a certainty, it will only serve to increase the revenues mobilised through indirect taxes. Other things remaining the same, this would increase the share of indirect taxes in total tax revenues. This increasing weight of indirect taxes in the combined revenues of the central and state governments would be further accentuated if the government also chooses to lower the ‘burden’ of direct taxes, for which too there is a clamour from many who are ardent supporters of GST (including the corporate sector). The problem with India’s tax revenue structure, however, is that it is already heavily biased towards indirect taxes (central and state) which provide more than double the revenues generated from direct taxes. This is a feature which has been long recognised as something that tends to make the tax structure regressive in character – making the poor working people bear a disproportionate burden of taxation. The immediate background of the introduction of GST is also one in which indirect taxes (in particular excise duties) have been the main drivers of revenue growth and the wealth tax abolished.


There is, therefore, an inherent class bias in the so-called push towards widening the tax base through the introduction of GST even as mobilisation of direct taxes from the corporate sector and the rich are neglected – which is why it has the unstinted support of big corporate capital even as their smaller counterparts are wary of its consequences. Indeed, even the relatively rapid growth of direct taxes for a brief period before the onset of the global crisis was mainly on account of an extremely sharp increase in inequality rather than any increase in the effective rates of taxation of corporate profits and high incomes. Since then, the direct taxes to GDP ratio has in fact fallen and fiscal ‘consolidation’ since 2011-12 has relied more on combining the restriction on public expenditures with revenue generation through indirect taxes. The Modi government in particular has taken advantage of the fall in international oil prices to significantly increase excise duties.

The issue of the degree of progressivity of the tax structure is of course an extremely important one in the context of the extreme economic polarisation that the neo-liberal growth trajectory has produced. There is also an additional dimension to that increase in inequality – the Indian economy’s current macro-economic difficulties are rooted in a fundamental contradiction underlying the present process of capitalist accumulation in India. On the one side, this accumulation process relies heavily on the maintenance of a cheap labour regime and the intensive exploitation opportunities it affords. On the other hand, this very circumstance acts as a barrier to the sustenance of the accumulation process – both by producing demand constraints as well as by limiting the scope for increasing the ‘productivity’ of labour.

Depressed agricultural incomes, a symptom of the agrarian crisis, and a large labour-surplus situation have reinforced the always present wage-depressing tendency in the Indian economy under neo-liberalism. Even workers in the organised industrial sector, often portrayed by capitalists as the illegitimate beneficiaries of restrictive labour laws, have experienced complete stagnation of real wages in the last two and a half decades and their share in value added has dropped to a little over a tenth. Thus, the working class and large segments of the peasantry, all who depend on earning an income through their labour, have been condemned to a low-income prison from which the economic system affords no escape. For capitalists, on the other hand, wage stagnation and depression have enabled swelling of the surplus and profit share (and the share of a small category of high-salaried white-collar employees) wherever it has been possible to increase the product per-worker and also the availability of a whole range of cheap labour and labour-intensive services. These in turn have provided the basis on which Indian capital and the Indian economy have been ‘competitive’ in the global economy to an extent.

The rise in the profit share of course has spurred in periods a rapid growth of investment by the corporate sector. A significant factor restricting the sustenance of such investment expansion has been the domestic demand effects of growth in a low wage economy. The expansion in the demand for market for manufactured consumer goods has remained restricted on the one side by the persistence of low income of a large segment of the population and on the other by an increased diversification towards services of the demand of those experiencing rising incomes. The pattern of demand too has tended to be biased towards greater import and capital intensity. Low wages can only go thus far in increasing global competitiveness of Indian manufacturing. Indeed, excessive reliance on cheap labour and the poor state of public education and health as well as other infrastructure combine to themselves act as barriers to improving labour productivity. Manufacturing in India has thus not been able to achieve rapid expansion through exports despite cheap labour. Given that manufacturing is both one of the significant sectors for absorbing corporate investment and the sector for which investment in turn creates the greatest direct demand – the demand side of the accumulation process has tended to repeatedly stall it. The current phase of investment stagnation in India is in fact the longest since the dawn of the neo-liberal era.


Fiscal policy of course can in principle play a very important role in correcting the impasse into which the neo-liberal growth trajectory has pushed Indian capitalism, and all indications are that the crisis is deep and enduring. Stepping up of public expenditure – on infrastructure, on agriculture and on social services – by mobilising greater resources from those who have the means to pay taxes can address the imbalances that underlie the impasse.  However, that would mean a departure from the cheap labour regime and the associated growth trajectory that has brought such benefits to big capital. The class outlook of both international finance capital as well as Indian big capital will always make them see any such shift as an aggravation, and not a solution, of their crisis. They therefore remain wedded to fiscal conservatism and their immense power ensures that the Indian State adheres to it. The inability to resolve the crisis makes them even more desperate to find a solution within the neo-liberal framework rather than discarding. The belief in the magical powers of GST, that it will work wonders for the Indian economy, is a reflection of this bankruptcy of Indian capitalism. Perhaps one could say that temporarily GST serves the function of being the opiate of capital!