1991 was a watershed moment for our economy. But it was just the starting point for the slew of reforms that followed. Ever since the liberalization happened, successive governments have tried to give continued impetus for reforms, with varying degrees of success. The reforms are on-going and just like before, the success rates vary. The current regime has under-taken immense effort in implementing more reforms like Demonetization, GST, RERA, IBC etc. And among those reforms, GST is the one that gets tweaked often.
GST implementation has been discussed ad nauseum, without ever reaching any meaningful conclusion. The benefits of GST were supposed to be numerous with the industries moving from the unorganized to organized sector. This expectation was so huge that even brokerages were busy selling this idea as an investment rationale. However, GST had a lot of issues from implementation to design. The sites were always down, GST credit was always late, and to add to it, GST rates proposed in the country were unfairly high for many products. Among the developing countries which have implemented GST, India top the list with the highest rates at 28% even for necessary commodities.
Ever since the corporate tax was cut in September, the eager eyes of the markets have been fixated on the possibility of GST as well as an Income Tax cut. But with the corporate tax cut there will be a hole of 1.45 lakh Crores in tax revenue for the government. The government is trying to bridge this using its privatization drive to keep the fiscal deficit below 3.3%. With consumption being subdued of late, tax receipts have shown a decrease with GST collection being lower compared to the previous year for the second quarter running.
The above table shows the GST collections for the corresponding months of the preceding year. One can see that growth has been tapering off ever since April. September was the worst hit in GST collections. There was not much relief even in October even though the month had two festivals (Dussehra and Diwali). There has been some relief in November though, with GST collections going to 1.03 lakh crores, which is 6% higher than the previous years.
So, why are we discussing GST collections here? Well, one of the most discussed news of the week has been the possibility of a GST hike to improve the prevailing deficit conditions. With an increase in inflation for the current month, consumption will further be affected. And when the common populace was anticipating an income tax cut, any increase in GST should come as a hammer blow for everyone including the very government which was aiming to reduce the deficit.
India’s dream of a 5 trillion USD economy hinges mainly on mainstreaming the unorganized sector. India’s retail market is estimated to be around 700 billion USD, of which nearly 90% is unorganized. It is quite clear the draconian taxes didn’t provide any impetus for the unorganized sector to move towards the organized sector.
The above table shows few of the commodities with their respective GST rates. It can be noted that even a necessity like biscuits is exorbitantly taxed at 28%. Recently Parle management had mentioned that people are having second thoughts about buying Rs 5 biscuits packs. Similarly, Mopeds are a basic necessity for any small-scale enterprise to tackle near distance logistics. Few sources in TVS (main player when it comes to Mopeds) have mentioned that the demand for the two-wheeler has plummeted, and they’re not expecting any changes to happen in the near future.
When the economic activity is coming to a standstill, it’d be counterproductive to increase GST. For a consumption-based country like India, it’d do irreparable damage. The very reason why 90% of the retail consumption is unorganized is because of the choking taxes imposed on these products. From the current tax levels, it provides no impetus for the unorganized player to move to the mainstream. Red-tape, time for implementation coupled with high taxes is a lethal concoction to deter people from spending money.
It’s kind of paradoxical that the government is levying a 28% tax on lotteries. These are mainly run by state governments. For example, in the state of Kerala, for a population of 3.34 crore people, 7.94 lottery tickets were sold. The government earned a whopping 9000 Crores from this. Add a 28% tax on this, and it’s a sizeable income for the state government. These sin industries are the ones who face the brunt of atrocious taxation.
Even the basic commodity for development like cement (infra), molasses (fuel blending), are taxed in an over the top fashion. This creates a subdued demand for the products. If the council decides to increase GST on products, it’d be a death knell for consumption. One has to keep in mind that India has one of the highest income taxes levied on salaried taxpayers.
Only 3% of Indian populace pays tax and 90% of retail consumption is in the unorganized sector where GST never materializes. Added to this are other miscalculations like inverted duty structure in GST. Raw materials for textile (yarn), fertilizer (Ammonia), mobile phones (batteries) are taxed higher than the final product thereby making imports much cheaper than domestically manufactured products.
Luckily, the week ended with the finance minister claiming there’s no move yet to hike GST. The word “yet” can be viewed as a key operative here. Radical measures take people of strongest will to implement. Reaganomics took near a decade to show effects. The government is implementing good measures every now and then. But opportunities like this present themselves only once in a blue moon. Fuel prices and interest rates are low, there’s a stable government at the helm of affairs, and more importantly manufacturing companies are leaving China due to various reasons. If we are not willing to bring down taxes, there’ll be other countries who will do it and reap the benefits.
Let’s hope the consumption and income taxes are brought down further and this helps segue unorganized sector into the mainstream !