Why should India not use blockchain for recording Goods and Services Tax (GST)?

Tax evasion, loopholes and corruption- I can’t think of any three better words to describe the country’s current tax system. It is no secret that we’re a part of the system that allows for bureaucratic potholes and corruption at every step and sometimes, it feels like there’s no will in the carriers of the system to change.  However, as always, there are always some sects that are there to implement better ways out of it. A while ago, blockchain was considered one of those resorts by various economists that could save India from its trap of tax evasion and how it can be put to use for GST collection. However, the aim of this article is to understand why blockchain is not the answer to India’s tax evasion.
Before we contemplate why and why it is not the solution- let’s talk about what blockchain actually is. Blockchain, the technology underpinning the bitcoin trend, is a database that is duplicated across a network of computers. It is designed to reconcile data regularly and constantly across the network. Since the data reside in millions of places, there is no central location or data management service. As a result, blockchain is very difficult to hack. All records in blockchain are public and verifiable. These features suggest there is much to be gained from employing blockchain for digital records and the gains extend well beyond currency. However, looking deeper into the system’s story would help us iterate a different story. Let’s look into it.
While talking of the blockchain system, what people often fail to consider is the problem of scale in the said system due to their realisation of the fact that blockchain data reside in millions of places. However, what they often tend to overlook is that each node does not have the computational capabilities to maintain the data. Take, for example, one of the largest and the most popular blockchain ecosystems- the bitcoin- which has about 10,000 full nodes because the size of the data on the bitcoin blockchain is over 320 GB. Now, with 10,000 full nodes, the network of bitcoin takes up to 10 minutes to process a single transaction because creating a block requires agreement between all nodes that transactions in a block are valid transactions. With 300-400k transactions every day, think of the electricity requirement of the system to be equal to the average electricity consumption of an Indian household in a year. Take a moment and read it again- transaction in one day consumes the electricity capacity of a year. This means that once we put GST on the blockchain, the lakhs of invoices processed in India on any given day would not only require a lot of power generation but also would severely add to the country’s already polluted atmosphere with heat and CO2 emissions. So, while we already melt in the scorching heat the country faces, with the GST being put on the system, we can imagine it getting a lot hotter.
We know economics stands on simplifying assumptions and ideal situations but they may sometimes be very different from reality. So is the case behind putting Goods and Services Tax (GST) to the blockchain system. The theory behind it involves all blockchain to be permissionless and public. But public and permissionless blockchain must have their entire transaction data available publicly so any node has a chance to validate them. More specifically, this means that the government would be willing to make all its GST collection data, including details of payments to classified military purposes, publicly available. Doesn’t really sound very realistic, does it? As another way out of the problem, they would have to use cryptography – which would necessarily restrict the set of possible nodes to ones with whom secret keys can be shared.  Ensuring cybersecurity for such a critical system would be a Herculean task, and even a single failure would compromise extremely detailed economic information about all public and private tax-paying entities in the country irreversibly.
The whole point of blockchain existence lies on the premise that the government’s instruments are untrustworthy and generate scope for loopholes. Now that we have established how publicly trusting each entity with government classified information of GST may not be a realistic option, you can think of something like a group of private conglomerates that can be trusted with the information. But then again, better than having a private conglomerate ecosystem just for handling the blockchain system, you might as well just trust a central entity managing the GST database.  However, note that the establishment of a blockchain system completely under the control of the government defies the whole purpose of the system’s establishment, as mentioned in the first line of the paragraph. The nodes are in control of a few entities and therefore, the blockchain becomes just a distributed computing application with certain desirable properties, such as redundant storage, no single point of failure or corruption, and certain undesirable properties, such as high response time and energy consumption. If the entities involved are few, or under the authority of a single power, as would be the case of the GST system, which would run under the Indian Revenue Service’s aegis, then those entities may well collude and manipulate the blockchain just as easily as a database.
While a blockchain system’s ideology is innovative and inspiring, it is still to prove its capabilities in a centralised system, beyond cryptocurrencies and escrow mechanisms, as vividly mentioned above. It is also to be noted that the country’s low tax revenues aren’t only based on the premise that people bribe officials but also the fact that nearly half of the population declares agricultural income on which taxes cannot be assessed, most non-agricultural income arises from informal, low-scale businesses whose proprietors have no incentive to declare their incomes and the low level of per capita income of the country in general. This means that there are a lot of areas to cover to solve India’s problem of tax evasion and apparently just stopping bribes wouldn’t really solve most of them. The country still has a long way to go.