Can't DiGeST it

We are about a week since the historic implementation of the Goods and Services Tax (GST), with many heralding it as the good simple tax. From the initial idea of what the GST was supposed to do, the current version is still not as simple as one would want it to be. For instance, the earlier one tax is actually now spread over four tax rate slabs. Likewise, there is an integrated GST (IGST), which one will need to pay when goods are passing across states, and there is provision to claim tax credit on IGST, which is well documented and explained.

Now, try explaining a trader sitting in Delhi’s Chawri Bazaar on first paying a tax and then claiming credit on it and you will get the choicest of abuses hurled at you. These traders work on proper bills, have their PAN, TAN and any other tax details that one needs. But, ask them about compliance, and they point at their accountants who manage it all for them. Things have now changed for them, as they have to ensure they are complying as per the regulations. Some are visibly worried, even as some others are figuring out ways to overcome this phase.

On paper, the GST system is good, but on paper, even the Indian cricket team at the Champions Trophy was the best, and had beaten their old foe Pakistan in the preliminary game. It is a different matter that despite the strong team, we lost to them in the finals rather disdainfully. But, GST is not a game of cricket—this has a direct impact on the livelihood of several people. Some people in the trade are already feeling the impact and we are just a week into the system to applaud or abuse it.   

Unemployment goes up

Every major tax or regulatory change in the past has impacted several lives and in some cases several sectors in the economy. The economic liberalization of the early 1992 was the beginning of the end of manufacturing in India, even as the services industry picked up. And now with this change in taxation, several small traders and entrepreneurs are either temporarily out of work or out of work forever. In contrast, the organised sector which is big, does need the support of the unorganised sector, especially in instances where it needs to outsource some of its operations.

Take for instance, the housekeeping task in offices – it is mostly outsourced. Now, if the outsourcing entity does not have a GST registration or there is a delay in procuring the GSTIN in their case—they will no more be able to continue working for the organised sector player. Now, on a given day, the number of such unorganised sector players, who work with the organised lot is significant and because of the compliance rules that the bigger organised player has to follow, they may not be able to continue doing business with this unorganised sector player.

I think there will be some serious haircut that the unorganised sector will need to take, as the GST compliance will surely take a toll on the financial health of SMEs. Economists indicate that the informal or unorganised sector accounts for nearly 50 per cent of India’s GDP and create about 80 per cent of the total job creation in the country. Now, even if there is a 10 per cent drop out of the unorganised sector post GST—the impact is pretty serious.

On the whole, the flexibility that states had to charge local taxes ceases to exist with GST. So, an automobile company, which could be wooed to a state purely on the basis of tax incentives, will no more be the case. Is this good for India? I am not sure, because by doing away with incentives, you are not making it appealing enough for one to take an offer, especially in a free market scenario. Without hazarding a wild guess, an Apple Inc. is unlikely to open an R&D centre or even production in the middle of UP, unless there is a compelling reason to do so, which includes tax incentives.

If certain states benefited from industrialisation in the past—it was because of the tax arbitrage. Now, that may no more be the case. While a consumer may seem to be fine with consumption tax being uniform across India, social issues may not really get addressed. An example that is often cited is that of the midday meal scheme launched in Tamil Nadu in the early 1980s, which over a decade of implementation significantly increased the literacy rate in the state, becoming possible only because of a tax instituted by the state to fund the meals.

Such ideas will no more find takers, because with GST in place there is very little to choose between Bihar and Maharashtra on the basis of tax regime. But, step back and look at doing business in both these states, and the decision of which of the two one will choose is obvious. Yes, GST is a revolutionary move, but history has proven that not all revolutions have successfully achieved what they had set out to. The real impact of GST will take some years to figure, the successful implementation of the same is no big deal.

nk@outlookindia.com