By Krishna Jha
India is a country where poverty is the most normal experience, no one is free from it except a few. Beginning from the day a child is born, hunger starts haunting it. Most of the days of life are spent in the grim shadows of a deep suffering. The larger sections of people spend their lives in miseries. The threat to life itself keeps alive at every stage. In the face of these grim realities, GST, irrespective of its rates, has complicated the situation even more. It is a form of tax which is perhaps the worst compared to other forms. For a country like India, where the poor have to opt for openings in informal systems to survive, the tax becomes an issue difficult to resolve. It also weakens federalism. States have no right to vote for a different indirect tax regime.
Also GST was imagined as a simple tax but started opening its complicated jumble of rates and compliances once imposed. The end result was total destruction of small and medium enterprises (MSMEs). Its effect on our economy has been devastating. The less number of slabs and lower rates for those essentials are unlikely to resolve the destructive aftereffects.
People can avoid Income Tax but no one can avoid GST. Whether you are ultra rich or absolutely poor you pay at the same rate. For ultra rich consumption is hardly 5 to 10 per cent. The masses of the deprived usually get very little in return for long hours of toil and that too if employed. The result is the entire earnings get spent on consumption alone. The toiler himself ends up paying highest. Irony is it all gets spent on ensuring luxurious life for certain few.
In fact, GST is useful only where per capita income is much higher, like economies in Canada, Australia, EU etc. It is regressive for low income societies where it works against the lower and lower middle class.
The Goods and Services Tax Council, in its 56th meeting, cleared some reforms for the new GST regime. The two main changes are that the four slabs, five per cent, 12 per cent, 18 and 28 percent, are to be brought down to two, and a new 40 percent slab has been introduced. As a result of the restructuring, the end price of several frequently consumed items are likely to change from September 22, when the new rates will come into effect. In short, a wide range of goods and items that are in common use will get affected.
The government claims that the changes in GST and the restructuring of its slabs would increase demand, which would mean more production, which would then become one more reason to drive consumption to further heights. This may cause more venues of employment and thus ensure more money with people to move on further.
The GST Council’s shift to a two-slab system with lower rates may look progressive, but denial of Input Tax Credit (ITC) in key sectors is likely to raise costs for businesses and ultimately for consumers. The ITC is the GST which is paid while purchasing goods or services for business purposes.
Similarly, the argument that with lower rates of taxes, revenue collection will rise cannot be taken in its face value. This, in fact, is a red herring. GST itself was supposed to check black income generation and boost tax revenue but that has not come about. The direct tax to GDP ratio should also have sharply risen but that, too, has not happened. There are frequent reports of fake companies, etc., proliferating to evade taxes.
It is pretty obvious that the government has introduced the GST reform to withstand the stress caused by US President Donald Trump’s bullying and protectionist moves. In part, therefore, the GST reform signals a shift in the nation’s approach to globalisation and exports. Not are Trump’s bullying and protectionist moves are likely to adversely affect India’s exports to the USA, India’s largest market, they are also likely to make the European Union market a difficult place for Indian exports.
This is the context within which lower GST rates are expected to help counter the loss of demand due to lower exports. GST is an indirect tax and is regressive. It is presumed that a cut in its rates would result in lower prices, provided the benefit is passed on to the consumers. This, in turn, is expected to boost demand from all consumers.
But the kind of GST reform which has been done has a problem. Simplification of the GST regime is not the same as its structural reform. What is crucial to boost the economy is not the GST simplification but rather its structural reform. This is because India has a huge size of its unorganised sector, which makes it too complex for the GST to deal with it. This is also something that no other major economy has.
Poverty is deeply entrenched in India’s unorganized sector that its production and consumption need special protection. In the name of protection, this sector is either exempted from GST or it pays a nominal tax under “composition scheme”. But that has also made things difficult for this sector. For example, the unorganized sector producers can neither get Input Tax Credit (ITC) nor can they offer it to those buying goods from them. Consequently, its produce becomes relatively more expensive than that of the organized sector. The result is a shift in demand from the unorganised to the organised sector.
Organised sector companies account for less than ten percent of total units in the country. It is these units that will receive the benefit of cut in GST rates and not the declining unorganised sector units, which account for almost ninety percent of the total units in the country.
Likewise, the produce of the unorganised sectors will also not receive the benefit, it will go primarily to the rich and ultra rich in the country. (IPA Service)
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