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Small Businesses do not exist for GST Model Law!!

TIOL - COB( WEB) - 508
JULY 07, 2016

By Shailendra Kumar, Editor

THEORETICALLY speaking, India is on the cusp of a transformational indirect tax reform in the form and shape of Goods & Services Tax (GST). Empirically speaking, India is miles away from such a reality. Politically speaking, it has become the most parroted promise in the past one decade. Even yesterday, while assuming office, the New Minister of State for Finance, Mr Santosh Gangwar, said, "We are hopeful that GST Bill will be passed in the forthcoming Monsoon Session as most of the political parties are in its favour." He also said that BJP is constantly in touch with the Congress party on this issue.

Let's now see how our Prime Minister, Mr Narendra Modi, responded to the GST-related question as part of his INTERVIEW shared with multiple newspapers. He said that in India's history, there has not been any law which has been debated as extensively and as long as the GST Bill. The consuming States have especially understood the benefits of GST. The poorest States will benefit even more. So far so good! But a vital clue lies in his ensuing statement - "I do not think any political party will try to commit suicide by opposing GST ..." Such a harsh description of the posturing of the key Opposition party, the Congress Party, clearly lets the cat out of the bag! Without even an iota of doubt, it can be inferred that the Modi Government has given up on bringing the main opposition party on board and it does not see a smooth sailing of the GST Bill in the Rajya Sabha. Some of the earlier political posturing that the AIADMK and even the Left parties would be extending their support to it was a mere speculation or headline-grabbing attempt. With the Congress Party leader Anand Sharma reacting trenchantly, it is unmistakable that the opposition parties management stratagems of the Government have not worked. The Monsoon Session will be rolling out from July 18 but the Sword of Damocles continues to hang over the 122nd Constitution Amendment Bill.

Anyway, let's move away from the dynamics of House politics and focus more on what is out in the public domain - the GST Model Law. This model law is a bundle of some good and some bad clauses. But, I do not intend to discuss them today. My focus today is going to be the large ocean of small businesses which include small traders; service providers, dealers, distributors and manufacturers. So far as the Indian economy is concerned, small is truly beautiful. It contributes richly to India's exports and accounts for a major chunk of the GDP and as much as 45% of job creations. But, by keeping the exemption threshold at Rs 10 lakh, the Centre and the States have clearly announced that they would like to punish small businesses even under the GST to hedge their own administrative inefficiency and rampant corruption. If all the key stakeholders of the GST on-going dialogue are indeed in favour of such a dismally low threshold, the loud and clear message which should not be confused with, is that the GST is going to be a reform measure only to provide some elements of relief to big businesses! In the present form of the law, even big businesses are losers.

Even a cursory glance at some of the global statistics relating to economies where the GST / VAT laws have been implemented, would reveal that the GST is not the right system if the exemption threshold is kept low. And the most prohibitive reason is going to be the abnormal rise in the compliance costs for small business. What does a high tax rate or compliance cost do to a small business is well known to all the State VAT authorities and even the Union Government in the context of services or small manufacturing units. Outright tax evasion is the answer. And, such a tax evasion can be said to be system-propelled evasion. Our political masters and the GST policy makers need to remind themselves of a global reality - all the good things flowing from the GST would not happen automatically. It calls for well-deliberated and positively-discriminating policy for small and large businesses and an effective administration. Low threshold would certainly not serve either of the purposes. Administratively speaking, it would mean more audit and enforcement costs than what may flow back to the revenue kitty.

Secondly, deriving 'sadistic' pleasure of having a large tax base of small businesses would not serve anybody's cause. If the States think that by having large tax base of such small taxpayers would help them in capping the Revenue Neutral Rate (RNR), it would not be desirable. What should ideally be done to break free from the colonial and suppressive history of tax administration is to fix a benchmark as high as Rs 75 lakhs. And let there be a Composition Scheme for a turnover ranging between Rs 75 lakh and Rs 1.5 Crore. Given the fact that the GST Model Law does not stop any business from taking registration voluntarily, a good number of small businesses which believe in doing serious business, would join the tax bracket on their own to do business with large enterprises. The biggest strength of the GST system is that a tax compliant large entity would always prefer dealing with tax compliant suppliers. Now, the fact that the Model Law has proposed to put the burden of compliance of its suppliers on large buyers and also collect tax at source on supplies above Rs 10 lakh contract value, let the system lure the small businesses to its lap rather than artificially subjecting them to high compliance costs by lowering the threshold limit! India needs to build a system that promotes good chain of compliance and prevents the bad compliance. And it would be a huge administrative task.

Another important, rather the most significant, parameter that would decide the good or bad compliance is going to be the GST rate. Since the key negotiators have not been able to thaw the ice on the exemption limit, the RNR remains unknown, and that is why there is no idea of what would be the GST rate(s). Whatever it is going to be, it should not be very high as that would also pose a serious challenge to the GST administration. A high GST rate would not only rob the confidence of the trade and industry in the political leadership but would also turn the ocean of consumers against the NDA Government. In addition, a high GST rate could be inflationary which would, in turn, hurt the poor the most.

Therefore, one obvious flaw in the Model Law is that it does not discriminate between a small and a large business entity. A positive discrimination is always needed to cushion the small businesses, and it would be ideal to have a separate and independent Chapter for them. This Chapter should contain everything - registration, returns, refund and also audit - once in five years. A simplified tax regime with simple forms would do good to the cause of GST. It would also promote the most avowed goal of the Modi Government - non-adversarial and taxpayer friendly tax regime and ease of doing business.

Let's also take a look at the growing criticism of the proposed GST levy on e-commerce sector. It is a fact that India's e-commerce sector is not very large, probably in the range of Rs 75000 Crore which would give about 15000 Crore revenue (at presumed GST rate of 20%) - not a substantial sum, perhaps! But the fact remains that the habit to pay taxes takes years to be fully groomed as part of one's good behaviour. Therefore, there should not be any exempted pocket in the economy. Then, once a high exemption threshold is fixed, it would not hurt a large number of small suppliers (traders or manufacturer-suppliers). TIOL Netizens may recall that when a preferential tax regime was provided to the IT and IT-enabled Sector in the name of sunshine industry, there was rampant abuse of such tax concessions and the burden of every such abuse generally gets transferred to good taxpayers who end up subsiding them! Therefore, it is certainly not a valid criticism that there should not be tax collection at source. When the concept of TCS can work well for the Income Tax Act, it would also work for the GST. It is true that the compliance costs of large e-commerce entities would go up but the same can be factored in in the profit margin. After all, GST is going to be the panacea of the prevailing matrix of tax woes they face either at the hands of State VAT authorities or Service Tax. A bit hike in the compliance costs for meeting TCS obligations may not mean much with the help of software. But their demand for clarity on the issues like cash options of cab operators; e-wallets and cash on delivery sales is valid and needs to be looked into at the time of polishing the Model Law.

In this backdrop, it cannot be said that the principles of improving the ease of doing business; clarity in tax laws; Easy Administration and non-adversarial regime, have really been kept in mind while finalising the provisions. Let's hope small businesses are finally viewed as a distinctively different community of taxpayers which calls for a separate sets of provisions and compliance procedures.