The Modi Government rolled out the Goods and Services Tax yesterday night. It is not clear why a programme had to be scheduled in Indian parliament at the midnight hour for this purpose. Is it because the government is more interested in impressing western audiences than the Indian people? Despite the media hype over the GST, the fact remains that a majority of Indian producers, traders and consumers remain in the dark regarding the GST mechanism and its implications. Here are some of my concerns.
1. When the GST was first conceived in the early 2000s, it was proposed as a single indirect tax for the entire country. Through the decade long deliberations it was realized that this “one country, one tax” idea actually goes against the federal structure enshrined in India’s Constitution. In order to reconcile the idea of a simplified single tax with India’s federal realities, the final version of the GST has emerged as a complex structure of CGST, SGST and IGST with multiple tax rates – 5%, 12%, 18% and 28%. Petro-products and alcohol for human consumption have been kept out of the ambit of the GST, where the old tax rates will continue to apply. After such an outcome, isn’t it ridiculous to still claim that the GST represents “one country, one tax”? How much simplification of the indirect tax regime has actually been achieved through this?
2. Since the GST Network is based on an IT platform, it will inflict significant compliance costs, especially on the small businesses. The process of filing monthly tax returns will not only make it cumbersome for MSMEs and small traders, but also force many others who can neither file tax returns online nor afford to hire professionals for this purpose, to close shop. The disruption caused by the GST within the informal segment of the economy, which contributes not less than 40% of India’s GDP, will be significant.The GST threshold of Rs. 20 lakh annual turnover (Rs. 10 lakh annually for North Eastern states) is quite low by international standards. The small (mostly self-employed) economic agents in the informal economy, who are yet to recover from the shock delivered by demonetisation, will get squeezed out after the GST shock. Sweetmeat shops in West Bengal (mishtir dokan), which will come under the indirect tax regime for the first time, is a case in point. Where is the safety net for these potential losers of the GST regime?
3. The confusion regarding the GST rates have persisted till the very eve of the GST rollout. In this milieu, there always remains a possibility of a sudden spike in inflation, which several countries have witnessed in the past following their transition to a similar taxation regime. Moreover, India is embarking on the GST regime with several commodities coming under the tax slabs of 18% and 28%, which are quite high by international standards. Prices of apparels, transport services and mobile services are widely expected to rise. The Government has also made it clear that the anti-profiteering mechanism will take time in coming into play. Where are the safeguards to protect the consumers in the short-run from sudden price spikes?
4. The GST has been welcomed across the political spectrum on the grounds that it will lead to substantial revenue gains and contribute to faster economic growth. Revenue gain is expected from the widening of the indirect tax base. It remains to be seen whether this expected revenue gain fructifies for all the states and the centre taken together or it becomes a zero sum game where those states which consume more than they produce, gain, at the cost of those who are net exporters. The argument that a supply side shock like GST introduction can spur investment and growth is an entirely fallacious idea, especially in a context where inadequate demand and the bad loans crisis have stifled private investment. Rather, the uncertainty surrounding the GST impact can further depress investment and growth in the short-run. If economic growth itself falters, how will the projections of enhanced revenue mobilisation materialise?
Rather than getting swayed by the media hype and official propaganda, let us keep these economic concerns in mind and assess the claims that have been made in favour of the GST, on the basis of objective facts and experience. One thing is certain though; the Modi Government’s strategy is to ensure a bigger market share for the Indian large corporates by repeatedly assaulting India’s small businesses and the informal economy, through steps like forced digitisation through demonetisation and the GST.