GST launch: New tax regime isn’t perfect; but by disowning it, Congress is forgetting fair rules of the game

GST, only a few hours away from the grand midnight launch, will be a major disruptor. It will certainly expose small entrepreneurs to pain in the short-term, and even the bigger companies. Even the ardent fans of Modi government wouldn’t deny this likelihood.

But, that’s not an excuse for the Congress-led opposition parties to forget the fair rules of the game by simply disowning GST in the last minute. Just yesterday, Congress leader, Ajay Maken said GST in its present format is “unacceptable” to the party as it will “ruin” small businesses and create “unemployment”. Maken is right about the impact on small businesses. But, there is an irony in questioning the very GST structure itself at this point. Here, Union Finance Minister Arun Jaitley has a pertinent point. The opposition parties were party to GST discussions all along. The format of GST was discussed and agreed upon.

The whole process moved ahead with political consensus. If the GST structure was unacceptable, the Congress and other opposition parties should have pointed out when the GST Council was debating the contours of the reform. The time to debate and discuss the grand structure is over. Disowning it at this point will send confusing signals to small entrepreneurs. Isolating the government on GST launch will do no help to the opposition side, instead it will only add to the already confused and worried public, particularly small businessmen. The moment calls for unity among the warring political groups and constructive discussions to minimise the pain of transition.

Not a perfect one

As pointed out in an earlier column, GST in the current format isn’t an ideal one, but it is good enough to begin with even with the imperfections. Right now, there are eight different tax rates. There will be zero tax rate for essential items that is used by the common man–fresh meat, fish, chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi, sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom etc. Then we have the 5 percent, 12 percent, 18 percent and 28 percent slabs as decided in the beginning by the GST council. With additional cess on luxury goods, there is a sixth slab. The seventh slab will be at 0.25 percent for the rough diamond and the eighth and final is for gold at 3 percent. That makes it a one nation and eight tax rates.

It is far from a flat rate structure many developed countries like Singapore has. But, at some point, India needed to take the plunge even with an imperfect rate structure. The multiple rates can converge at a later stage when the country gets used to GST, after the transition pain is over and initial hiccups are addressed.

In 2015, a panel headed by Chief economic advisor (CEA) Arvind Subramanian had proposed a three-tier structure for GST. A concessional rate of 12 percent for public goods that concerns the deprived or weaker sections, a standard rate of 17-18 percent that would concern majority of items and a rate of 40 percent for luxury items and tobacco, aerated drinks and pan masala etc.

GST fine tuning will not be too difficult an exercise as rate is not part of the legislation and it is up to the GST Council to decide. The big relief from the GST rate structure is that common man will be insulated from price shocks with most of the daily used items out of the high tax slabs. Besides, this will also help contain the pressure emanating from GST roll out on the inflation—a big worry for the central bank and the monetary policy panel. But there are big positives. Global investors will finally see India cracking a major reform, albeit with inadequacies after a long period of time. All in all, even in the current shape, GST is still better than having a no GST at all.

The big concern on what GST could do to small businesses is real and the government hopefully has mechanism to address the likely job losses and disruption in the informal sector. Tiny shops, which will come under the GST ambit, will have to be ready for the change. Till now, many of them don’t even have a computer to do accounting. To ensure compliance with GST, they need to hire chartered accountants and consultancies. Many of these businesses may not be able to comply and shut shop resulting in job losses in the unorganised sector.

Hence, there is a possibility that the small businesses segment, estimated to account about 45 percent of manufacturing and employ more than 117 million people, might see a number of jobs losing on account of rise in compliance cost and new complications that will come in with GST. In an Economic Times article , Ritika Mankar Mukherjee, Senior Economist (Vice President) with Ambit Capital, warns that among other results, GST could “result in a meaningful loss of jobs in the informal sector as this sector will no longer be able to fly under the radar of the taxmen.”

These problems are severe. There is no escape for the Modi government from them post the midnight show. The government could have waited till September for the final roll out. Two more months delay would not have made much difference after waiting for this to happen for more than a decade. But, it chose to stick with the 1 July date. Now, it’s the government’s responsibility to manage the aftershocks. The opposition would do well adopting a wait and watch approach and point out inefficiencies when the roll out happens. Merely disowning the GST structure at the eleventh hour, after being party to discussions all along, amounts nothing but forgetting fair rules of the game.