Stung by Slowdown, Centre Starts Reining in GST-Caused Havoc

Changes to GST rates may open a Pandora's box, while the jewelry-PAN decision sees the government walking away from its fight against black money.

Union finance minister Arun Jaitley addressing the media after the 22nd meeting of the Goods and Services Tax (GST) Council, in New Delhi on Friday. Credit: PTI/Atul Yadav

The changes are supposedly in line with Modi’s assurance that any sector will be provided assistance if structural reforms have caused a slowdown. Credit: PTI

New Delhi: The Narendra Modi government is starting to carry out course-correction measures aimed at plugging the adverse effects of its fight against black money and a hastily-implemented goods and services tax regime.

On Friday, the GST Council rolled back some of the tax regime’s key provisions to provide relief to small businesses and exporters. It also  reduced tax rates on more than two dozen items.

In addition to these two changes, the Centre also withdrew a crucial identification requirement for jewellery purchases of over Rs 50,000.

In August this year, the Modi government extended provisions of the Prevention of Money Laundering Act (PMLA) to the sector and stated that a PAN card number would be required for all transactions above Rs 50,000; earlier rules had it at Rs 2 lakh. This was done at the time as part of the government’s strategy to fight black money and curb terror financing.

However, the jewellery industry has now been brought outside the ambit of the PMLA and as a result, there is no requirement for jewellers to seek a PAN number from customers for high-value purchases.

Over the last three months, the government has been under pressure to take corrective measures ever since data showed that the GDP contracted unexpectedly in the April-July 2017 quarter, giving credence to the widespread concern that a shoddy implementation of GST, coupled with measures like curbs on gold retail and demonetisation, had hit the economy hard.

Businesses and exporters are expected to feel relief due to easing of compliance burden. But by reducing tax rates on select items, the government has opened a Pandora’s box – other industries could now also seek similar concessions. According to tax analysts, it would have been better if the government had reduced tax slabs instead of tax rates.

A complicated GST structure has increased compliance burden for businesses, hitting hard small enterprises while exporters have seen their working capital requirement go up significantly. Supply chains have been impacted, with small vendors finding it difficult to comply with new indirect tax regime.

In particular, exports of labour-intensive items, mostly produced by micro, small and medium (MSME) enterprises, have suffered because of GST. For example, gems and jewelry exports plunged by nearly 23% in August after dropping 29% in July. Exports of ready-made garments posted anemic growth of 0.56% in August after falling by nearly 12% in July.

Exports of leather and leather products grew marginally by 1.73% and 2.04% in July and August, respectively. Handicraft exports declined by 0.26% in August.

Growth rates of exports from labour-intensive sectors post GST

Items July August
Gems and jewellery (-22.70) (-25.78)
Ready-made garments (-11.86) 0.56
Leather  and leather products 1.73 2.04
Handicrafts excluding carpets 4.23 (-0.26)

Source: Commerce Ministry

Significantly, the MSME sector was still reeling from demonetisation when the GST was implemented. The requirement of monthly filing returns was a big cause of worry for small businesses who were earlier outside taxation net. They were required to upload their own invoices and reconcile them with those of suppliers and pay GST on a monthly basis.

Traders under the composite scheme were not allowed to do interstate sales. Exporters’ input tax credit had got accumulated, choking their cash flows. These businesses have now been given relief by finance minister Arun Jaitley.

India’s gems and jewellery, leather and leather products and textile industries are highly labour-intensive and key sources of blue-collar jobs.

For example, India’s textiles and apparel sector alone contributes about 10% to manufacturing production, 2% to the GDP and 15% to the country’s total exports earnings. The sector is the second largest employment provider in the country, employing about 5.1 crore people directly and 6.8 crore people indirectly in FY 2015-16.

The garment sector provides employment to 1.23 crore people as per data compiled for 2016-17. At a time when big corporate houses are shedding jobs, these export-oriented sectors have been quite resilient.

But threat of massive lay-offs loomed as these sectors saw precipitous drops in exports during July and August, forcing government’s hand.

While the government has given some relief to the MSME sector on the GST front, small businesses are feeling suffocated by key conditions of the ‘Make in India’ scheme and unable to duly benefit from it.

This had led the Federation of Indian Micro, Small and Medium Enterprises (FISME) to write to Prime Minister Narendra Modi to seek changes in these provisions. FISME has sought changes in provisions relating to value addition, purchase preference quota, pre-qualification requirement for participation in government tender and an end to the growing practice of bundling of tenders.

“The condition of a minimum value addition of 50% to qualify for the preference is unnecessary. The stated purchase preference needs to be made available to domestic manufacturers, whatever be the extent of value addition. High barriers help MNCs as only they can overcome such barriers through transfer pricing and cross-subsidising,” says the letter written by FISME president Dinesh Tripathi to the prime minister.

The letter also seeks the prime minister’s intervention to increase purchase preference quote for the domestic industry from 50% to 75%.

Tripathi has also sought changes in pre-qualification conditions for participation in government tender. “Pre-qualification requirements are framed in such a manner that they block entry of new domestic players including MSMEs and tend to perpetuate monopoly of the entrenched players chiefly MNCs. The PQRs need to be subjected to intense scrutiny and debate,” the letter says.

It adds, “Government projects are increasingly being farmed on turnkey basis. The turn-key contractor like a public procurement agency ought to follow the conditions of ‘Make in India’. Similarly, practice of ‘bundling’ of orders is used to crowd out MSMEs as with higher threshold only a handful of large players and MNCs remain in the fray.”

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