Note

There is an Alternative
Bharat Jhunjhunwala

Tere is an urgent need to revisit the proposed Goods and Services Tax (GST). VAT as well as GST can be used to generate employment and make life easier for the common man. Tax rates can be reduced on labour-intensive products like handlooms, paper envelopes and agarbatti and beedi; and increased on capital-intensive goods like TVs, cars and air-conditioners. The biggest challenge before populous states like UP, Bihar and Bengal is to generate employment. Trades such as handlooms have been wiped out because of the big-business oriented policies of the Union Government. State Governments should commission a study to ascertain the labour content of various goods that are sold in the market. Tax rates can be reduced on labour-intensive goods and increased on capital-intensive goods while keeping the average rate unchanged. That will have no financial impact on the revenues of the State Government and also on the consumers. Yet this will generate employment because labour-intensive goods like handlooms will become cheaper and their demand will increase while capital-intensive goods like machine made cloth will become expensive and their demand will reduce. GST must be opposed by state governments because that will limit the ability of the State to change tax rates in this direction.

State Governments across the country are bending backwards to provide free or heavily subsidized electricity and water to the farmers. This is logical given the low price of agricultural produce being fixed by the Union Government. But this is leading to a huge misuse of these scarce resources. The same water can be used to irrigate double the land if apportioned evenly between the farmers at the head and tail of a canal. It is necessary to raise the price of electricity and water in order to cajole the farmers to use these resources judiciously. The challenge is to neutralize the impact of this price rise on the farmers. This can be done by allowing the price of agricultural produce to rise proportionately. The next problem is to manage the burden on the consumers of this increase in price of farm goods. The solution is to reduce taxes on goods consumed by the urban people by the same amount as the revenues collected from the increase in price of electricity and water. This would make the price move neutral for the farmer, consumer and the State Government. The farmer will recoup the payment for electricity and water from higher price of his produce; and the consumer will recoup the higher price of farm produce from lower taxes on other consumables; and the State Government will recoup the reduced collection of taxes from increased collection from electricity and water. Yet this will lead to a huge increase in production because of judicious use of electricity and water.

Frontier
Vol. 45, No. 5, Aug 12-18, 2012