Agli Baar Kiski Sarkar

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At Delhi’s sprawling wedding market this peak season, none of the traders were issuing pucca bills: “Do we do business, or do we file GST?” The most audacious tax reform of India has thrown the economy completely out of gear

VIKAS KUMAR

VIKAS KUMAR

Journalist with more than 15 years of experience. He has worked as a Special Correspondent in The Sunday Indian and as Assistant Editor in NewsBench

Raju Haldoi, running a small-scale leather processing factory in the Lal Bagh area of Kanpur, is not a happy man these days. His business was down by almost 40 per cent after demonetisation, and when it started recovering, the much-publicised Goods and Services TAX (GST) destroyed it.

Facing an existential crisis, he has told his five labourers to return their villages — and Raju is not alone; just take a stroll into the dusty bylanes of the leather hub of the country, and you will have a rough idea how GST has affected the informal economy by snatching away livelihoods of millions. However, it’s not that only business has been affected; filing tax returns is another big headache for many of his ilk. It’s like a double whammy for them.

Lal Bagh Market Traders Association President Rajendra Gupta told this scribe, “There is no clarity in taxes. Most of the traders are illiterate and they don’t know how to fill GST forms. And even these officers have no clue. And the worst part is that we’re afraid of raid raj.”

So if you feel Kanpur is an aberration, let’s move to Surat textile hub — more than 70,000 traders had to go on an indefinite strike a few months ago because the government chose to apply five per cent tax on yarn. Because of this strike Husain Gafoor, a labourer, is unemployed since then — and he has no means to earn his livelihood.

While talking to Parliamentarian magazine on the phone — he broke down and sobbed intermittently. “Filing returns for a person like me is very difficult. should I look for my dwindling business or take care of compliance?” Whether you go to Moradabad, Agra, Sahibabad or any other market — you’ll have the similar stories to hear.

Half Baked

Now it’s clear that similar to demonetisation, government preparation for rolling out GST was grossly inadequate. The government even avoided testing of the GSTN system to roll out GST in haste, and no wonder, a huge number of software glitches were reported by traders. Rajendra Gupta says, “Filing of returns has become a gargantuan task and I missed the second deadline for filing the return.”

Many experts had already warned that because of the sheer complexity of the taxation system and untested GSTN software, the result would be sub-par, creating a big headache for traders. Hansmukh Adhiya, the finance secretary, says: “These are small software glitches and that will stabilise in the next 3-4 quarters.” However, these supposedly small software glitches and procedural complexities have turned GST into a nightmare for traders and service producers. “The GST site does not work well, which is creating a lot of confusion among traders. Many of our clients have called up saying they can’t file returns. If this continues the government might need to extend the last date of filing by another couple of days at least,” says Prateek Jain, chairman, Assocham Special Task Force.

The traders are clearly in distress. Prateek Mathur, a jeweller in the Vasundhara locality of Ghaziabad district, told this reporter: “GST is not even clear to tax officers. They should have been trained first, and then they should have trained us. Now everybody is working in haste. So there is complete chaos.” The most common complaint of traders and shopkeepers is the lack of infrastructure to be GST compliant. Praveen Khandelwal, president of Confederation of All India Traders, told Parliamentarian: “There are about 100 million small traders and shopkeepers and nearly 60 per cent are computer illiterate. But the GST can be complied with only via a computer system.”

Wrong Assumptions

The government had not, in reality, anticipated this problem. Though the central government claims to establish 1,000 tax filing hubs for shopkeepers and traders — are these sufficient for 10 crore shopkeepers in the country? So traders are witnessing demonetisation like long queues on these tax filing centres to meet the GSTN deadline.

The problem with GST is not just related to filings returns. Leading tax lawyer, Arvind Datar, had explained how daunting it’s going to be for service providers in a presentation. He had cited an example of a diagnostic service provider operating in many states.

According to a rough estimate, he’ll have to file 49 returns annually in each state, so in case the business operates in 12 states — they’ll have to file roughly 588 returns annually. And the government says GST will ease the compliance burden! As of now, they have to just file two returns annually at the centre level. Financial services and NBFCs will face the same problem.

Double Tax

There is another big headache related to Input Tax Credit. Suppose a restaurant purchases goods worth Rs 1,000 to produce a dish having a price of 2,000, then the total GST collection would be Rs 360. However, the restaurant is getting back Rs 180 as input credit. So, their profit increases by Rs 180. This is wrong, for a restaurant should only collect Rs 180 from customers and paid it to the government. That’s happening because they are earning a profit of 180 Rs from input tax credit. Ideally, in the GST taxation system, these service providers are only a vehicle for collecting the tax and passing it to the government. How is it possible that they collect more tax and pay less tax to the government? That’s a big flaw in the GST structure that the input credit is available if and only if the invoices of the buyer and the seller match. Now the big question is — how many suppliers can a restaurant owner chase? The possibility of changing suppliers is difficult if they have been traditionally sourcing them for a long time — and even if they change, a large number of people in the supply chain will lose their jobs. That’s the big reason restaurants are not reducing the tax burden on customers, since they are not sure of getting the input tax credit back. The logic is the profit earned on input tax credit will compensate for the loss caused by stuck-up input tax.

Fading Credibility

The credibility of the GST depends on how fast input tax credits are refunded — considering the unfriendly attitude of Indian tax officials, it would indeed be a huge challenge. A Ghaziabad-based steel factory owner shared his view on the condition of anonymity: “As a producer, if we realise that getting the input tax credit is taking longer than usual, seriously affecting our working capital requirement, we will stop accepting fresh orders and cut quantum of production.”

This has already started happening, not just in the steel sector, but in the other sectors of the economy as well. Take medicines, for example, essential products like this are already experiencing a supply crunch as they are clearing the stock’s post-GST.

The pharmaceutical industry depends heavily on input tax refunds. Any withholding of the working capital would severely affect the supply chain of the healthcare industry in the country. A similar situation is faced by processed foods, garments and other industries. As of now, input tax credit worth Rs 65,000 crore is already stuck if rules on refunds under Goods and Services Tax are not eased. If this is not solved, the liquidity of traders would be badly affected.

Formalising Failure

Government officials say the objective of this is to formalise the informal economy, and the method of the conversion is coercion by the ruthless tax machinery. They want to do it fast — destroying the economic ecosystem that has developed over in the last two hundred years. GST has disrupted the whole supply chain of this informal economy without any tangible benefit.

Modi and his finance minister (though the latter had hardly any hand in deciding the date of launch, had made much fanfare about formalising the economy and cleaning up the so-called black money stashed up in conceivably in every Indian home. That has been proved a bloomer, and in the meanwhile, the economy has been suitably ruined.

Most traders want to be the part of the GST system, however, when they feel that following it hampers their business growth or affects the sustainability of the business, they’ll find the way to avoid it.

A well-known Moradabad-based handicrafts merchant told Parliamentarian, “I fail to understand how the GST serves such a purpose when one tax regime has been replaced by an equally ineffective and more draconian tax measure. I fear the kind of destructive effect we see now is nothing compared to what lies in store.”

Most traders feel that GST will seriously undermine the viability of small businesses that provide employment to a majority of the population in the country. The basic structure of the GST is such that it passes the tax burden of the formal sector to informal sector.

A well structured and efficient indirect tax system offers easy compliance. GST, unfortunately, does not pass this critical test. Small and medium-sized businesses are struggling to adjust to the rules. The government claims that the online system is easy and convenient, but the experiences of millions of small traders tell a different story and it does not echo the views of bureaucrats sitting in South Block.

Though GST is certainly bringing more traders in the tax net, a large number of traders, who feel that they will lose out to those not in the GST system; are doing their level best to avoid it and it defeats the very motive. Kumar Nandan, a Purnia-based owner of a small fleet of trucks, says: “What are the incentives to an honest transporter like me? A businessman can be honest when everybody in the supply chain is honest.”

He demonstrates an example: suppose a transporter buys a tyre from a local trader and pays him in cash. The local tyre trader has some pieces of tyres which are unaccounted for. He pays GST on the declared number of tyres and accepts cash on the undeclared tyres in. When the incentive, to be honest, is zero, tax avoidance seems tempting.

And mandarins in the South Block have started realising this. “With the new GST regime firmly entrenched, a complete overhaul of the tax rates is now required to reduce the burden on small and medium businesses,” Revenue Secretary Hasmukh Adhia said.

Anomalies Galore

There are still lots of confusion left in the GST system. Angshu Mallick, chief operating officer at Adani Wilmar, points out one such anomaly — the lack of clarity on whether mandi tax will be merged with GST or not. In Uttar Pradesh, there is 2.5 per cent mandi tax and it varies across different states — and such anomalies need to be weeded out, and soon too.

GST is certainly the biggest indirect tax reform the country has ever seen.It was an ambitious plan the Congres had first thought of. But certainly it could have been implemented in a better manner.

When Hansmukh Adhiya was talking to media persons, Raju was still engrossed in filing tax return in a cyber café—and he looked flustered when the system showed ‘“System Error GSTIN NO. 34AAXXXXXXXX1ZX”. He has not lost the hope, and is preparing to try again. But his woes are piling up, and so is his ire with the Modi Sarkar.

So, agli baar?

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