It’s not GST, the problem is the structure of the Indian economy

Illustration by PealiDezine

There’s no question of getting rid of the tax, but it needs to be made more palatable for small businesses. 

The more one understands how the Goods and Services Tax (GST) has been working, the more the question poses itself: Is this a bone that is now stuck in the economy’s throat — hard to swallow but also cannot be spat out? The problem is not the tax, which has much to say for itself. Rather, it is the structure of the Indian economy, which comprises mostly small and tiny businesses.

Many of these, it would seem, are either unable to cope with the complexities of the tax, or are being made to pay tax for the first time, or have been disadvantaged in other ways — the whole of it spelling disruptive change. If so, is the GST advisable only for more developed economies, not one that still functions mostly in the unorganised sector?

Not really, because there is the good news that GST revenue collection has been creditable. The states will get their budgeted tax numbers, which include 14 per cent growth of last year. The Centre may face a deficit because it will account for only 11 months’ revenue this year, but even that may cause only a small hole in the books. Indeed, the rate cuts announced so far reflect confidence that revenue may not fall short; if further rate cuts are announced, it would confirm the confidence about revenue. So the first goal of tax collection has been met.

The bad news concerns mostly the small and unorganised businesses, especially those that supply to downstream businesses. Many of them have been functioning by evading or avoiding tax. To the extent that the GST system plugs much of the evasion loophole, or substitutes non-taxpayers with businesses that pay their tax, it is change for the better — and constitutes a second positive development. These are sound reasons for swallowing the GST as good medicine.

But can the treatment be successful if the patient is reeling from its after-effects? The transition for small businesses is disruptive because it has taken place overnight. And some of the change is decidedly for the worse as far as they are concerned. The small businesses that opt for a nominal flat rate of tax, but without input credits, are at a disadvantage because the downstream customer-company could opt for a larger supplier who offers input credit.

And small players who choose the new option of filing returns quarterly, rather than monthly, will get their tax credits only after three months, thereby increasing their credit needs. Exporters have faced a similar problem. A small businessman could get around the problem by filing monthly, or choose to not go with the nominal-tax option. He then faces the full procedural rigours of the GST filing system.

The procedures seem to be daunting. Between 25 and 30 per cent of the seven-plus million businesses that have migrated to the GST system have not been filing their returns. About 40 per cent of those who have been filing report zero returns. Also, nearly 95 per cent of those filing to report tax paid have an average payment of perhaps no more than Rs 20,000. At that level of tax, their annual turnover is almost certainly less than Rs 1 crore. Meanwhile, the 25-30 per cent of the universe who have failed to file are also likely to be in the small or tiny business category.

It is hard to see how a system with such poor filing compliance by millions of small businesses can cope with the matching of zillions of buyer-seller invoices, which is supposed to start before too long. The risks of chaos (especially if people have made mistakes while filing) must be real. Yet, there is logic to the official position that, without the matching of invoices, the GST loses much of its meaning. One must hope very hard that the system will be fundamentally simplified before all its procedural requirements are demanded of millions of businesses. The alternative, of spitting the whole thing out, is simply unthinkable.

By Special Arrangement with Business Standard