On July 1, 2017, the Bharatiya Janata Party-led government rolled out the Goods and Services Tax, envisioned as an umbrella levy to subsume all other indirect taxes. But the implementation of the ambitious taxation regime was marred by glitches and its complex structure, with multiple tax slabs, left traders and manufacturers confused.
A year after the ambitious reform was rolled out, Scroll.in spoke to India’s first chief statistician, Economist Pronab Sen, to assess the GST’s functioning and impact on the economy. Sen explained why multiple rates were introduced, what led to the glitches and why the GST is so complex. He also weighed in on whether it has increased revenue or decreased corruption and tax evasion. Sen identified those whom GST has impacted adversely, and examined whether the BJP is trying to homogenise India’s economy, as it seeks to do with its culture. Excerpts:
A year after GST was implemented, do you think it is a good and simple tax, as Prime Minister Narendra Modi pitched it, or is it, as Congress President Rahul Gandhi said, a Gabbar Singh tax, symbolising oppression?
It is a good tax, but it is by no means a simple tax. It is vastly more complex than any of the taxes it has replaced. This complexity is because of multiple rates and multiple authorities. You have the SGST [State GST] and the IGST [Integrated GST], and you therefore have to deal with 29 State, seven Union Territory authorities, and the Centre. The simple part of GST is very questionable.
The GST demands some degree of technological felicity.
Yes and no. With a lot of our earlier taxes, we were anyway moving towards an electronic-based solution. It is impossible to maintain a hard copy-based tax system. Earlier, you had a whole bunch of semi-professional people filing returns. That will now be done by a new breed of people. But the GST system, because it is far more demanding, require people with higher skills. They are not just handling data operations. They need to understand the GST, which is not simple.
A World Bank report says that only five countries, including India, have four different GST rates. Why did we opt for multiple rates?
Think of these multiple rates as a transitional mechanism. [With one rate] a whole bunch of sectors would have seen a reduction in tax burden. But a much larger bunch would have seen an increase. So there would have been a far higher degree of resistance to GST than what has been witnessed.
Many thought it was callous of the political class to introduce a system that threw up several glitches. After all, glitches do impact livelihood, don’t they?
Yes, they do and did. But some glitches are inevitable and no human being can plan for it. For instance, you can’t always predict beforehand the capacity of your server. Without going into specifics, some glitches are designed deliberately to give the taxman some discretion, which is then leveraged. Remember, the system was driven by a bunch of insiders. There is therefore a question mark on how many glitches were inevitable and how many deliberate.
There were around 128 notifications and 161 circulars issued from July 1, 2017 till date. Isn’t that huge?
No, it isn’t. Even for the earlier excise tax, the number of notifications that used to come out was enormous. It was worse for customs. The figures you cite are normal. It is so because we have five tax rates. The confusion was about which rate applied to which product.
The book that earlier defined sales and excise tax was organised under different chapter heads. Each chapter had one rate. The problem with GST is that within a chapter heading, you have multiple rates. Take capital goods as a chapter head. Each of the five rates would apply to different capital goods. Clarifications were required so that a class of products would have one rate. Whether there is one rate for all products is not as important as it is to have one rate for a class of products.
GST was also sold as a mechanism to nab tax evaders and curb corruption. But many, especially those registered with the state GST, complain that to get refunds, they have to pay 3% of the amount due to them. Or else there are delays in refunds.
As I said, there are vested interests in the tax system. They were looking at a situation where the GST was affecting their livelihood.
But that livelihood was illegitimate?
They had been making illegitimate money for so long that for them, it had become legitimate. Legitimacy lies in the eyes of the beholder.
Do we have statistical tools to identify tax evaders? Has corruption increased, decreased or remained the same before and after GST?
We will get an idea once audits, searches and raids begin. Frankly, it is too early to start that process now. If you do that now, GST will be dead. It will hugely enhance the resistance to GST. This is because it will be hard to make out evasion from genuine confusion arising out of GST’s complexities. I don’t think the crackdown on evaders will happen before three or four years. By then, the excuse that they didn’t know [which rate applied to them] can’t be cited.
But will GST generate data to figure out tax evaders?
What GST will do is that it will generate patterns and when deviations start to show, it is then the taxman can step in to ask questions.
But the earlier system must have been generating patterns as well?
The big difference is that data then was not electronic. You could not do statistical data analysis until you had turned it into an electronic form. That is a lot of work. The good thing with GST is that since the system is electronic, the data is available to you from Time Zero.
We need to wait for three or four years for identifying evaders because there can’t be a pattern without a past. Four or five years later, the system will be in much better position to identify evaders.
Is One Nation, One Tax, which the GST was supposed to be, happening?
One nation we are, GST is one tax. In a purely semantic sense, One Nation, One Tax has happened. But the more important question is whether it feels one tax to those paying GST. They don’t feel it is one tax. They feel that it is one Central tax and 36 state taxes. A person has to register with each separately and file returns separately. A system is needed in which one return should satisfy all the states and the Centre.
Has GST helped increase revenue?
It should not be increasing if they had done their work properly. This is because rates were supposed to have been calculated as being revenue neutral. [After all,] the system was bringing 17 taxes into GST and was to therefore get the same revenue.
But it was said that the revenue would increase because a lot of people who were evading taxes earlier would not under GST.
That is not obvious. GST’s real benefit was supposed to be the widening of the tax base. The main widening has come from the services sector.
Why?
Earlier, the service tax was a Central tax. The Centre just does not have the bandwidth to tax all services. They were only able to tax those services which were in the formal sector, those that were large. All other services were simply under the tax radar. States, on the other hand, have the network of people to tap the entire service sector. The ambit of activities to be taxed has become much wider. That is where your revenue increase is coming from. To say that since the revenue has gone up, ergo, evasion has gone down is not a right statement either.
We have been growing and so tax collection would increase anyway. It happened in the older system as well, year on year. The question is: Has GST allowed you to collect more taxes than what was normally expected? I haven’t seen any calculation on that.
But what is your sense of it?
Tax collection is not extraordinarily higher than what it would have been otherwise.
Many in the MSME [Micro, Small and Medium Enterprises] sector wonder what the GST’s gains are, given that they still have to pay 3% on their refunds and also that new cash trails are being invented.
To say that is not correct. In the older system, a lot of taxes impeded trade, the rational development of the logistics system. Those issues the GST has tackled. Sure, there is corruption; the creation of alternative cash trail was predictable.
Based on the last estimate I saw, I think 6.6 million or 66 lakh units were registered with GST. In India, from the last economic census, we know that there are 60 million enterprises. You are basically covering just about 10% of all enterprises. So 90% of enterprises, which of course don’t account for huge amount of money, are outside the tax structure. Why do you expect them to do anything different because of GST? They will continue with their old ways.
Maybe it is hard for them to continue with their old style of business?
No, it isn’t. It is hard for those MSMEs which deal with both the formal and informal sectors. They straddle that space [that is partly formal, partly informal]. It is they who are complaining. The bigger guys don’t care less – they don’t deal with the informal sector anyway.
In an interview to me last year, you said that MSMEs contribute about 28% to India’s GDP, and that 28% supports roughly 50% of the country’s population.
Remember, that 28% excludes agriculture. Of the 28%, a very large chunk has not registered with the GST, as they are below the taxation threshold. This lot should be about 15%. GST doesn’t concern them. So it is [those contributing] 12%-13% [to the GDP] who are straddling [the formal and informal sectors]. For the moment, it is very unsettling for them. We won’t know the outcome until three, four years.
Overall then, what has been the GST’s impact on the informal sector?
There are two kinds of transactions within the informal sector. The bulk of transactions are between two unregistered guys. This form of transaction does not get impacted at all.
The other form involves the informal sector transacting with the formal sector. That has been impacted. It is here the straddlers are playing the transitional role. Earlier, the informal sector could deal directly with the formal sector. But because of GST they will have to go through an intermediary, which will be an MSME. He will be registered with the GST, he will pay in cash to buy products from his supplier. But he will show he is manufacturing the products. He becomes the first point of taxation and generates GST certificate. Obviously, he foregoes input credit – that is the deal he makes.
But the loss of revenue to the state wouldn’t be much, right?
It doesn’t involve any real loss.
One chartered accountant from Kashmiri Gate told me it is hell for small traders. He likened their situation to that of marginal farmers and believes a lot of them will be simply edged out.
Not necessarily. The majority of straddlers comprise traders. After agriculture, construction and industry, the fourth largest sector is trading. They have to invent new channels of doing things, of accounting. At the moment, they are in a tough spot.
It is so tough that they can’t even pay the chartered accountant’s fees…
The real reason behind their woes isn’t GST, but demonetisation, which eroded their capital base. Give them time.
Do you think GST’s other goal, of formalisation of the economy, is being met?
It depends on how you define it. At one level, yes, it has happened. The number of units pre-GST was about 34 lakh units. In just a year, the number of units that registered with the GST doubled to 66 lakh units.
The other indicator is very interesting, though we can’t tell whether it is because of GST. If you look at the registeration of companies under the Companies Act, it used to average 20,000-25,000 a year. It shot up to a lakh last year. I don’t know why companies are registering under the Companies Act. But the fact is that this trend has coincided with the rollout of GST, so GST could be a reason.
What GST has done is to tilt the balance in favour of the formal sector. That is because the formal sector has the efficiencies which the informal sector does not have. But depending on the strategies they adopt, the informal sector can claw its way back. That is the challenge facing your trader friends.
Has the GST facilitated employment generation, as is claimed by some?
I don’t understand how GST itself would help generate employment. Formalisation does not mean new jobs. When 34 lakh units, registered with tax authorities, goes up to 66 lakh units after the GST rollout, it does not mean that there are 32 lakh new units. These are 32 lakh old units which chose to register.
Which means they have to adhere to the Employees’ Provident Fund laws as those 34 lakh units did; their emergence in the EPF data was interpreted as hiring of new employees.
Yes, they have to adhere to new laws, but it does not means the jobs in these 32 lakh units are new. This confusion needs to be cleared. But to claim that there are 32 lakh news units and so many new jobs have been created since GST was rolled out is, well, plain absurd.
You see, the EPF data was simply not available until this year, when Ghosh and Ghosh got it. [Professor Pulak Ghosh and Dr Soumya Kanti Ghosh. On the basis of EPF data, they claimed that an astonishing quantum of jobs was added within a year of GST.] Till then, the EPF data was a complete black-box.
The BJP has always believed in One Nation, One Culture. To it, the party has added One Nation, One Tax and then, One Nation, One Election. Is economic behaviour amenable to greater uniformity than social behaviour?
The two can’t be kept apart. In fact, economic behaviour is conditioned by social behaviour and social relations. So to say that everyone in India will behave like an archetypical economic Indian, that is not happening, will not happen and should not happen.
Is there an attempt to make it happen?
It all depends on what will happen to the social side – it is that which will drive the economic side. Things are still in a state of flux. The plan to homogenise culture has just begun.
But does GST represent a step towards homogenising economic activities?
No, within the GST framework, different models will appear depending on cultural relations. A lot of the [process of] interface between the formal and the informal economy will be based on trust and social relations. That will vary from area to area.
The government has to be sensitive about that, right?
They don’t have much of a choice.
Do you see the government milking GST for political gains?
I don’t think anyone can monopolise the credit. If the Central government says it has brought in One Nation, One Tax, well, it has not done anything of that kind. It is the GST Council, consisting of finance ministers of all states, which has done it.
One thing that has not been adequately emphasised is that the GST has set a template for Centre-state cooperation. Although it is a Central initiative, the entire design and operations were led by the states.
Getting back to the first question: Can GST be called a Gabbar Singh tax?
GST is not a Gabbar Singh Tax. It is a good tax, but complex. What GST has done is that it has equalised the complexity for everyone. Earlier, under the plethora of taxes, people had to pay only a subset of them. The degree of complexity differed from entity to entity – for some it was very complex, for some far less. GST has equalised the complexity.
But the skills and wherewithal of everyone is not the same.
Only for some, and that is assuming they were not facing complexity earlier. But GST is certainly not a Gabbar Singh Tax.