The Narendra Modi govt has announced a GST launch rehearsal on Wednesday in the run-up to the official rollout of GST in the Parliament House midnight on Friday. That is good. But one hopes that the government is devoting enough and more time to face the aftershocks of the historic, yet massively disruptive, tax reform particularly on small businesses which are still on a shaky ground to migrate to the new regime.
The Modi government can afford to have flaws in the midnight GST show, but it cannot afford to underplay yet another demonetisation-like disruption in the economy, causing job losses and chaos at the bottom of the pyramid. The costs would weigh the expected long-term gains by a big margin, which isn’t a desirable thing to happen in an aspiring, yet fragile economy, where a sizeable number of population still live below poverty line. Already, the economy is fighting a growth slowdown and myriad structural problems.
The Modi government’s readiness to deal with potential job losses among small businesses post the GST rollout and to offer a back-up mechanism to the industry in the event of IT infrastructure failing to efficiently function is critical. Any significant failure in the whole process will have serious ramifications both in the domestic economy and among international investors who are keenly watching the developments in the country.
There is a possibility that the small businesses segment, estimated to account (read a Reuters report) 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. For each state they operate, companies will have to file 37 tax returns annually — three-four each month and one at end of the year, the above cited report says.
That means these small entrepreneurs will need to hire chartered accountants and computerise their operations. Though this is good in terms of bringing the informal sector to the formal and widening the tax-base, one undesirable outcome of this transition could be some companies opting to under-report sales to cut tax cost and even opting to shut small shops where revenues may not see a corresponding increase with respect to the compliance cost.
Economists have warned about this. 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.”
As one would like to believe, the GST rollout may not necessarily work wonders for India in its true sense. Only time will tell how the ultimate impact is going to be. For those who doubt this possibility a report prepared by chief economic advisor, Arvind Subramanian, is a good learning material.
Citing the international experience, the report says “Most of them (countries implemented GST or GST-like structure) face serious challenges. They are either overly centralised, depriving the sub-federal levels of fiscal autonomy (Australia, Germany, and Austria); or where there is a dual structure, they are either administered independently creating too many differences in tax bases and rates that weaken compliance and make inter-state transactions difficult to tax (Brazil, Russia and Argentina); or administered with a modicum of coordination which minimises these disadvantages (Canada and India today) but does not do away with them.”
Another round of job losses (the last one we saw after demonetisation-induced cash crunch hit small businesses and pushed informal sector to cut labour), would be too much for the Modi government to handle. Reforms are critical and initial hiccups are inevitable, but keeping the India’s fragile economy, particularly informal sector, which plays a key role in providing jobs to a large number of Indians, in good stead is as important.
A recent report by Credit Suisse on the impact of GST on small business had noted the concern among small businesses to migrate to the new regime.
Already, the graph of employment generation under the Modi government is on the declining course. The government, despite its many initiatives such as ‘Make in India’, has not generated enough jobs to accommodate more people in the formal workforce. Analysts typically tend to associate everything in the informal sector with tax evasion and parallel economy. That isn’t always true. This segment has all along played a crucial role in sustaining people at the bottom of the pyramid, particularly in the rural areas of the country.
Are they given adequate time, assistance and confidence to migrate to a radically different tax regime? If the government hasn’t done that already, even with the two months relaxed tax filing window, it is staring at utter chaos in the small trader segment. Besides job losses the government can also expect new tricks by tax cheats in the form of under reporting the sales and income. The GST-lobby would argue against this possibility saying input tax credits is a big incentive for the tax cheats to turn tax compliant; but what if they choose to completely stay out of the whole thing to escape scrutiny, or simply shut shops?
Revenue secretary, Hasmukh Adhia has refused to acknowledge the risk of potential job losses saying this would be offset by new service sector jobs, but what is the certainty that such a miracle would happen? And what if it doesn’t? Roughly a month after demonetisation in November, job demand under the NREGA scheme had shot up by 60 percent (read here). In hindsight, that wasn’t a good thing. It only meant that more people are being pushed out of factory jobs and are forced to opt for job guarantee programme of the government that required no special skills.
There is a chance that this may repeat post the GST rollout. How about rehearsing to face such an aftershock dear government?
Updated Date: Jun 28, 2017 14:38 PM