Prime Minister Narendra Modi’s war against black money has got an unanticipated antagonist right on the other side of his table. The cherished Goods and Services Tax (GST) will be the first major policy which will go against the ideals of demonetisation and transformation of Indian financial behaviour in an era of less cash.
Gold and real estate, the primary destinations of black money, have received a thumbs-up under GST, while financial investments will become dearer under the new tax regime.
With a mere 3 per cent tax on gold against 12 per cent tax on medicines, GST has done nothing to target the implicit tax subsidy on the yellow metal milked by the super-rich. Real estate has also been kept out of the purview of GST.
India, by virtue of being a cash economy, has a traditional bias towards physical assets, such as gold and real estate. The Credit Suisse Global Wealth Report 2016 confirmed that a whopping 86 per cent private wealth in India has been parked in gold and real estate, while in the US, financial assets account for around 72 per cent of total wealth. Japan and UK have 53 per cent and 51 per cent of wealth in financial assets.
The entire demonetisation drive of moving away from cash to the digital medium was supposed to encourage financial investments (bonds, insurance, shares, bank deposits) and discourage buying of gold and land, where a major chunk of black money is deployed. Sadly, with GST the whole idea of transparent investment is now upside down.
The meagre GST rate on gold hints at the country’s retrograde policymaking procedure, where some assertive lobbyists can manage to influence government decision. It was only last year that Arvind Subramanian, the chief economic adviser of the finance ministry, equated the policy of trifling tax on gold as a subsidy for the super-rich, befitting the analogy of a suit-boot sarkar.
Subramanian’s Economic Survey of 2015-16 has this to say about gold: Gold is a strong demerit good: the “rich” consume most of it. In India, 80 per cent of the consumption of gold is limited to only 20 per cent people.
Among them, the major buyers constitute only 2 per cent of the entire population. Yet, gold is taxed only at about 1-1.6 per cent (before GST – states and Centre combined), compared with a tax of about 26 per cent for normal goods.
Completely ignoring their own economic adviser’s advice, the GST rate on gold is the lowest. Medicines, shoes, food and entertainment will attract four to nine times more tax than the yellow metal.
Irony dies many deaths when we recall PM Narendra Modi’s clarion call for us to get over our obsession with the yellow metal while launching the gold monetisation scheme in 2015.
If the idea to discourage gold was genuine, the yellow metal should have carried the highest tax under GST. This could have encouraged people to invest in gold bonds instead of buying the physical metal.
If GST stands for financial transparency, then land and immovable property should have fallen under the ambit of GST. It is essential to create a common national market of real estate by harmonising property registration and circle rates across the nation.
Without keeping a digital oversight on sale and purchase of land and houses, it is impossible to curb deployment of black money in fixed assets.
Immoveable property is one of the fundamental resources and inputs for every economic activity. Therefore, tax on the same must be part of the input credit system like other taxation.
However, driven by revenue obsession, states preferred to keep immoveable property out of GST, thus keeping it open for anomalies and black money investment.
GST does not encourage financial investment either. The service tax on financial services is being increased from 15 per cent to 18 per cent. This will push up mutual fund management and share brokerage charge. Insurance will also become costlier.
Right at the time when sensible and synergised policymaking has become vital, there are contradictions galore.
First published in dailyo.in
