Almost 20 years ago, a pathbreaking infrastructure project that connected India like never before took off. In more ways than one, the Golden Quadrilateral highway network has contributed in a major way to our economy through increased trade, mobility and accessibility. This month, the blueprints of an expressway just as important, if not more, may finally become a reality. The new highway goes beyond the Golden Quadrilateral.
This not just connects major cities but reaches the entire country, every nook and corner, and touches every single person within. Enter the goods and services tax (GST).
The GST is nothing short of a super expressway with the power to create anational market that works equally well for farmers in villages, families and businesses in small towns, and youngsters in corporate India. The problem is that the toll gates are down.
As Parliament meets for the second phase of the Budget session this month, legislations that bring the GST into effect must be in the forefront. It’s no longer just desirable but imperative if India is to emerge from the present global economic rut as a more powerful and equitable economy. Already, there are major headwinds for the world economy from the US and Europe to larger emerging economies, and the failure to pass the GST this session would release a deluge of ambiguities towards consumers, businesses and investors.
It is commendable that the central and state governments have ironed out the final few remaining details over the past few days. By all indications, the July 1 launch date will be met. GST is one of those rare economic reforms that enjoys multipartisan support and has been worked upon by successive governments.
It is also reflective of the follies of current indirect taxes, with over a dozen central and state levies choking interstate trade, and have led to imprecise classification of products and services, high cost of compliance and the cascading effect on prices from taxes on taxes. The value added tax (VAT), introduced in 2005, intended to fix many of those ills. But it achieved little in its diluted, uneven form with states setting their own rules and rates.
SMEs’ Place Under the Sun
With the GST, we have the chance to relegate all of that to history. A product can then move from Kashmir to Kanyakumari without fear of double taxation or having to comply with state-by-state tax laws. Producers will find it easier to maintain accounts as it’s all digital, and consumers eventually benefit from lower, uniform prices across the country.
The entry restrictions we face for e-commerce goods in over a dozen states will also be a thing of the past. In fact, the tax predictability will add to millions of formal jobs, besides raising productivity, output and consumption — all positive factors that could raise GDP by around 2 percentage points.
India’s destiny lies in services, domestic consumption and small and medium enterprises (SMEs), unlike China’s manufacturing and exports-fuelled growth. With the GST, SMEs can hope for a boost to their business. They can scale up without fears of tax complexity or predatory regulation.
They can even hire more and pay more wages as the tax incidence reduces. SMEs are our best bet if we have to empower millions of our youngsters to find work and lift millions more from the clutches of extreme poverty.
So, government policies must work in their favour, even if SMEs lack a collective voice or tend to yield low bargaining power.
To that end, the provision of tax collected at source (TCS) actually works against SMEs that want to expand by selling online. It mandates that online marketplaces — not traditional, offline retailers — must deduct a percentage of the amount payable to sellers and remit it to the government, which sellers can claim credit for at a later stage.
While the decision to cap TCS at 1% is a welcome move, the provision in itself throws up new challenges for SMEs, especially those operating on thin margins.
Besides, TCS chips away at one of the GST’s core principles: that it would be industry-agnostic. TCS also counters GoI’s digitisation drive.
If, for example, a mobile shop owner in Ludhiana sells a phone screen guard worth Rs 100 through an e-marketplace, the GST draft law states that Rs 1 should be withheld from the seller as TCS. However, if he has only earned Rs 5 from the sale, implying a notunusual 5% margin, the TCS freezes 20% of his working capital. Multiply that by crores of rupees and the number is staggering.
The Tax Trap
TCS is not only a disincentive for sellers to move online, making a part of their operations formal with clear audit trails, it also wrongly assumes they favour tax evasion when selling online. If the objective is to increase compliance, the 1% rate can arguably be pruned down to 0.25%. That would be equally effective.
The next phase of the country’s growth is likely to come from the millions of SMEs closer to ‘real India’. By empowering SMEs through a favourable GST, we can reach the levels of society that are yet to reap the benefits of globalisation.