An employee carries goods at a retail outfit warehouse on the outskirts of Mumbai. Credit: Reuters
As we bid farewell to 2017, The Wire looks back at some of the markers of disruption that affected different spheres, from politics and economics to technology and films.
The central hall of parliament was the National Democratic Alliance (NDA) government’s choice of venue for the launch of the Goods and Services Tax (GST) regime. A midnight session on June 30, 2017, in what could only be construed as a throwback to the historic ‘tryst with destiny speech’ delivered by India’s first prime minister Jawaharlal Nehru to the Constituent Assembly on August 14, 1947.
However, as The Wire had indicated at the time, the GST has failed to live up to the hype. If anything, it has proved a nightmare for businesses in the short-term, especially for those in the informal sector. In the run-up to the launch, the Modi government roped in film star Amitabh Bachchan, often tapped to help spread awareness about the Centre’s programmes, to star in a host of videos that all promised “one nation, one tax and one market”.
Unfortunately, much like GST itself, this is true only in word and not in spirit. While there are a number of procedural and technical reasons that have proven responsible in making GST troublesome for India’s informal economy, the single most overarching problem is that the Indian GST is much more complicated than what other countries have implemented. It has as many as six tax rates unlike other countries where a single rate prevails.
Moreover, both the Centre and states have the power to collect tax in India unlike other countries where this authority is vested in a single agency.
This is primarily why India’s GST also remains just a half-way house, with major items of consumption for industry like petrol and diesel, natural gas and electricity still outside its ambit. That means companies which these products as raw materials cannot avail input tax credit.
In the weeks and months after it was rolled out, the tax reform led to disrupted supply chains and hit exports hard as small businesses found it too complicated to comply with. Exporters saw their working capital requirement shoot up in the wake of GST roll-out on July 1 due to accumulation of unpaid input tax credits and reduction in duty drawback rates on their products.
Following India’s switch to GST, exports have witnessed an uneven monthly growth trend. Merchandise exports showed a negative growth of 1.12% in October. Exports from labour intensive sectors like gems and jewellery, apparels and leather and leather products reported precipitous drops during the month, raising a spectre of massive job losses.
Ironically, this came at a time when the global trade was in a boom phase. As per the latest forecast by the World Trade Organisation (WTO), global trade is likely to grow by 3.6% in 2017, up from the lacklustre 1.3% growth in 2016. While India’s exports have rebounded in November, encouraging some economists to express optimism that the industry might have shrugged off negative impact of GST, the picture is far from clear. A sustained trend of growth in exports is yet to be seen.
Intensive help
In the last few months, as state elections grew closer, the Modi government simplified compliance procedures and rules to provide relief to the industry. However, there is no end in sight to the woes of the country’s exporters.
Ajay Sahai, director general and CEO, Federation of Indian Export Organisations (FIEO), told The Wire, “The refund process has slightly improved as compared to October but still thousands of exporters are waiting for their July refund. Even customs and tax authorities are unable to tell the reasons for delay. For ITC, refund has been symbolic.” Sahai added, “The declarations are redundant; the refund is based on nexus, not on the formula prescribed and documents are not clearly listed. These have compounded exporters’ problems.”
Anil Bhardwaj, secretary general, Federation of Micro and Small and Medium Enterprises (FISME), too has flagged similar concerns. “While in the beginning MSMEs struggled with registration and filings, now the challenges they face remain in invoice matching, claiming refunds and making corrections. Absence of real-time support during filing or payments means if you make mistake, you are stuck,” Bhardwaj told The Wire.
“While a lot has improved, the GST framework is a still a long way to offer ease of working with GST,” he added.
Also read: Explained: The Short, Medium and Long-Term Fallout of India’s GST
Critics maintain that the GST was rolled out in haste. They cite its frequent tinkering by the GST council to buttress their argument. Micro, small and medium enterprises (MSMEs), which form the backbone of the country’s manufacturing sector, were hit hard. Garment exporters say their export competitiveness has fallen due to the increase in working capital requirement and reduction in incentives. As per industry estimates, Indian garment exports have become 8-10% costlier after GST roll-out, which is hurting exporters’ margins as well as sales volumes.
Alarmed over the sharp decline in October exports, the government has offered more incentives to help stem the bleeding for besieged garment exporters. Post-GST rates for claiming rebate of state taxes under the scheme for remission of state levies (RoSL) on exports of readymade garments and made-ups have been announced. The government has also doubled the rates for incentives under merchandise export from India (MEIS) scheme to 4%.
New MEIS rates are effective from November 1.
Post-GST rates of RoSL are up to a maximum of 1.70% for cotton garments, 1.25% for man-made fibre, silk and woollen garments and 1.48% for apparel of blends.
As part of the mid-term trade review policy for 2015-2020 early this month, the government has announced fresh export incentives to labour-intensive sectors and services, which would cost the exchequer Rs 8,450 crore annually. Meanwhile, the commerce ministry is working on a relief package for gems and jewellery exporters. The ministry has already asked the gems and jewellery industry to work out a proper business plan to promote growth of the sector.
“We have some time left, in another few weeks we have to finalise it as Budget will be in February, so we have to work on that (relief package for gems and jewellery exporters),” commerce and industry minister Suresh Prabhu said recently. The Gems and Jewellery Export Promotion Council has demanded that import duty on gold should be slashed to 4% from the current 10% level.
The trade body is mindful of the government’s concern that a lower import duty could lead to a spurt in gold imports but hopes that a cut would be finally made as a trade-off. Another MSME-dominated sector, leather industry, estimates that it would need additional capital of over Rs 3,000 crore following implementation of the GST. There is a fear in the industry that many units could close down due to failure to raise capital.
The Council for Leather Exports, an industry body, has demanded that Centre’s duty drawback scheme for leather exporters should be extended till March 2018 as exporters’ capital was blocked on account of GST payment.
The industry body also wants the GST on finished leather goods and job work reduced to 5% from the current level of 12% and 18% respectively.
A labourer pushes a handcart loaded with sacks containing tea packets, towards a supply truck at a wholesale market in Kolkata. Credit: Reuters/Rupak De Chowdhuri/Files
Softening the blow
In successive meetings, the GST council has approved comprehensive changes to smoothen the hard edges off the new tax regime. To this end, it has significantly reduced number of products under the highest rate of 28%. The council also relaxed return filing rules for MSMEs, deferred the controversial reverse charge mechanism until the next fiscal and hastened tax refunds for exporters hit by cash crunch.
The GST council on October 6 slashed rates on 27 items and 12 services, and introduced sweeping changes in GST rules to calm panic among small enterprises and exporters who were struggling with procedural tangles, refunds and technical glitches while filing returns on GSTN portal.
Specifically, the annual turnover threshold on the composition scheme has been raised from Rs 75 lakh to Rs 1 crore.
Under the scheme, traders, manufacturers and restaurants can pay tax at 1, 2 and 5%, respectively. The turnover threshold has been increased by the government to ease the compliance burden for taxpayers as they will have to file returns on a quarterly basis, not every month as required for normal taxpayers.
However, unlike normal tax payers, dealers cannot avail input tax credit. About 15.5 lakh assessees with a turnover of less than Rs 1 crore have opted for the composition scheme, as per official data. Again in its meeting on November 10, the council pruned the list of product categories under 28% slab to 50 from 178 earlier.
These rapid changes have not been without consequences. Indirect tax collections this fiscal are feared to dip below the Centre’s target due to disruption caused by GST, which has in turn cast doubt over the government’s ability to meet the fiscal deficit target of 3.2%.
The Centre plans on collecting Rs 9.68 lakh crore from indirect taxes in the current fiscal while a mop-up of Rs 9.8 lakh crore has been targeted from direct taxes. Direct tax collections increased by 14.4% to Rs 4.8 lakh crore during April-November this fiscal. However, GST collection (indirect taxes) in October at Rs 83,346 crore was Rs 12,000 crore less compared to the preceding month and the lowest since the July 1 roll-out.
Also read: Why the Current Rate of Economic Growth Is a Flawed Indicator of Ground Realities
According to government sources, uncertainty prevails over whether tax realisation would be as per budget estimates in the remaining months of the fiscal. The Central Board of Excise and Customs (CBEC) has also privately warned the Centre that indirect tax collections could fall short of target due to disruption caused by the GST.
N.R. Bhanumurthy, Professor, National Institute of Public Finance and Policy (NIPFP) told The Wire that the Centre’s tax collection target might not be realised due to uncertainty relating to GST. He, however, added that it was too early to say whether the government would be able to meet the fiscal deficit target or not.
With long-awaited revival of private investment nowhere in sight, the government is banking on increased public spending to support the economic recovery. GDP growth inched back to 6.3% in the second quarter after slumping to 5.7% in April-June period. If the government tightens its purse strings now, the economic recovery could derail, hitting jobs.
Job creation prospects are already dim, with labour intensive sectors like agriculture, construction and continuing to remain in the doldrums.
Agriculture GDP growth slowed to 1.7% in the second quarter from 2.3% in April-June period. The construction sector grew by 2.6% in the July-September quarter, slightly up from 2% in the preceding quarter.
Road ahead
The Centre is keen to bring remaining items like alcohol, petrol and diesel, natural gas, electricity and real estate under GST. However, doing so would be challenging for it given that states’ nod is needed for making any change in the GST. These items contribute a significant chunk of states’ tax revenues and so they are likely to resist any move to include them in GST.
The Centre too is mindful of the difficulty. For example, finance minister Arun Jaitley has said that the Centre supports the inclusion of petroleum products within GST’ ambit, but it can happen only if states come on board.
“As far as the Central government is concerned, we are in favour of bringing petroleum products under the GST, let me categorically put it. But we will wait for the consensus of the states. And, I do hope that at some stage – sooner than later – the states would agree to it,” Jaitley recently told the Rajya Sabha in reply to a question.