Indians, Be Prepared! Petrol-Diesel Prices Are Likely to Stay High

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The price of petrol in India is at a four-year high. The price of diesel is at an all time.  And from the looks of it, petrol/diesel prices are unlikely to go down any time soon.

Narendra Modi took over as the prime minister of India in May 2014. The average price of the Indian basket of crude oil during the course of the month was $106.85 per barrel. Petrol was sold at Rs 80 per litre in Mumbai and Rs 71.41 per litre in Delhi. Diesel was being sold at Rs 65.21 per litre and Rs 56.71 per litre respectively, in the two cities.

Cut to March 2018. The average price of the Indian basket of crude oil is much lower at $63.80 per barrel. Petrol, as on April 3, 2018, is being sold at Rs 81.84 per litre in Mumbai and Rs 73.99 per litre in Delhi. Diesel is being sold at Rs 69.06 per litre and Rs 64.86 per litre, respectively, in the two cities.

The average price of crude oil in March 2018 was 40.3% lower than it was in May 2014. But the price of petrol and diesel, which are products made out of oil, is higher now than it was in May 2014.

What explains this? One reason lies in the fact that the rupee has depreciated against the dollar. One dollar was worth around Rs 58-59 in May 2014. In March 2018, it is worth Rs 64-65.

This basically means that Indian importers of oil have to pay more in terms of rupees for the dollars that they need, to buy oil. Hence, to that extent petrol and diesel will be costlier. But this still does not explain.

At Rs 59 to a dollar, one barrel of the Indian basket of crude oil would have cost around Rs 6,304 in May 2014. At Rs 65 to a dollar, one barrel of oil would have cost around Rs 4,147 per barrel in March 2018. Even after adjusting for the depreciation of the rupee against the dollar, oil was around 34.2% cheaper in March 2018 in comparison to May 2014.

So, what explains the fact that petrol and diesel are now costlier than they were when Modi first came to power?

The retail price of petrol and diesel, constitutes taxes collected by the central government, the respective state government where they are being sold, as well as the dealer commission.

Let’s consider the situation in Delhi in May 2014. The retail selling price of one litre of petrol as mentioned above was Rs 71.41 per litre. The price before dealer commission and taxes was Rs 47.12. This meant that Rs 24.29 per litre was collected as dealer commission and taxes. Of this, Rs 2 made for the dealer commission. Rs 10.39 was the tax collected by the central government. Rs 11.9 was the tax collected by the state government. The dealer commission and taxes constituted 34% of the retail selling price of petrol.

Now let’s cut to March 2018. The retail selling price of petrol as on March 19, 2018, in Delhi, was Rs 72.19 per litre (this is the latest data available). The price before dealer commission and taxes worked out to Rs 33.78 per litre. This basically means that Rs 38.41 per litre was collected as dealer commission and taxes. Of this Rs 3.58 was the dealer commission. Rs 19.48 was the tax collected by the central government and Rs 15.35 was the tax collected by the state government. The dealer commission and taxes constituted for around 53% of the retail selling price of petrol.

Basically, between May 2014 and now, the dealer commission and taxes in total have gone up by 58.1% (in Delhi). A similar dynamic has played out in other parts of the country as well. The same logic holds for diesel as well. In fact, dealer commission and taxes made up for 21.5% of the diesel price in Delhi, in May 2014. As on March 19, 2018, it made up for 43.2% of the retail selling price.

What has happened here? The central government and the state government, since 2014, have captured a bulk of the fall in the price of oil, by increasing taxes on petrol and diesel. While the average price of the Indian basket of crude oil was $106.85 per barrel in May 2014, it had fallen to as low as $28.08 per barrel in January 2016. A commiserate fall in petrol and diesel prices did not happen.

One of the major policy decisions of the Modi government when it first came to power was to increase the excise duty on petrol and diesel. Along similar lines, the state governments also quietly raised taxes on petrol and diesel.

In an ideal world, when the consumer did not receive the full benefit of falling oil prices, he should at least be protected a little from high prices of petrol and diesel. But that is unlikely to happen, given that the central government is not making as much money through the Goods and Services Tax (GST), as it expected to.

How is the GST linked to this?

For 2018-2019, the government expects to collect Rs 6,03,900 crore as central GST. This amounts to Rs 50,325 crore per month, on an average. In the month of March 2018, when the collections for February 2018 were made, the central GST collected amounted to Rs 27,085 crore (Rs 14,945 crore  was collected as central GST + Rs 12,140 crore was the central government’s share in the integrated GST). This is way lower than what the government has projected in the annual budget.

Unless, central GST numbers improve, the total revenue collected by the government will be under pressure in 2018-2019.

In this scenario, when the government is already under pressure on the revenue front, it is highly unlikely to decrease taxes on petrol and diesel, and help the end consumer. If it does so, there will other costs that will have to be paid for, right from a rising fiscal deficit to a higher interest rate.

As far as the international price of oil is concerned, there are way too many factors influencing it at any point of time, to make a reasonable prediction about it. Having said that, one factor that needs to be kept in mind is the up-coming initial public offering (IPO) of Saudi Aramco, the biggest oil company in the world.

The IPO is being billed as the biggest IPO in the world and is likely to unveiled by the end of June 2018, newsreports suggests.

In this scenario, it is highly unlikely that Saudi Arabia will allow the price of oil to fall from these levels, until the IPO is pushed through. The Indian basket of crude oil has seen a largely upward trend since June 2017.

Long story short, Indians need to be prepared for a period of high petrol and diesel prices.

The column originally appeared in the Quint on April 3, 2018.

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GST — 9 Months Later

The Goods and Services Tax (GST) has been in existence for close to nine months now. By now, we have sufficient data and other evidence to figure out, how well the nation has taken to this new tax.

Let’s first start with how the GST collections have been between July 2017 and February 2018. Take a look at Table 1.

 

Table 1: GST collections

(Amount in Rs Crores) Month Collection
August, 2017 93,590
September, 2017 93,029
October, 2017 95,132
November, 2017 85,931
December, 2017 83,716
January, 2018 88,929
February, 2018* 85,174

Source: Lok Sabha Unstarred Question Number 4809 and www.pib.nic.in
* Up to March 26, 2018.

As can be seen from Table 1, the GST collections have fallen over the months, after having peaked in October 2017. Let’s dig into the numbers in a little more detail. The total GST collections for the month of February 2018 stand at Rs 85,174 crore. Out of this the central GST amounts to Rs 14,945 crore. In the month of January 2018, the total central GST collected had amounted to Rs 14,233 crore.

If this trend of central GST collected continues in the months to come, the central government might get into some major trouble on the revenue front. The question is why? In 2018-2019, the central government expects to collect a total of Rs 6,03,900 crore, as central GST. This amounts to Rs 50,325 crore per month, on an average.

The current central GST collections are nowhere near this number.

In comparison, in February 2018, Rs 42,456 crore was collected as integrated GST, which is split between central and state governments. In January 2018, the total integrated GST collected had been at Rs 43,794 crore.

Further, Rs. 12,140 crores is being transferred from integrated GST to central GST account for February 2018. Thus, the total central GST collection for the month will be at Rs 27,085 crore (Rs 14,945 crore + Rs 12,140 crore). This is nowhere near the Rs 50,325 crore that the central government expects to collect every month through central GST.

If this trend continues in 2018-2019, the revenue expected to be earned from GST, will be way short of what has been projected, unless central GST collections improve significantly from their current level.

Clearly, there is a problem here.

Around 1.05 crore taxpayers have been registered under GST up until now. Out of this number 86.37 lakh taxpayers are required to file a monthly return, the rest come under the composition scheme and are required to file the GST return quarterly.

Of the 86.37 lakh taxpayers who need to file their returns monthly, 59.51 lakh filed their return for the month of February 2018, up until March 25, 2018. This basically means that only 69% of taxpayers who are required to file a monthly return, did so. So, nearly a third of the taxpayers who are supposed to be filing tax returns, aren’t doing that currently.

The question is why is this happening? The GST network carried out a survey in October and November 2017, and the answers it got are fairly interesting. Let’s take a look:

1) There were gaps in general understanding of the electronic processes for complying on GST Portal (Specific technical Issues like Digital signature related problems etc.)

2) Helpdesk is not able to respond to problems effectively.

3) Mistakes in return cannot be corrected.

4) Site performance being slow and has multiple problems.

5) Contextual help not available. Errors are generic and non-intuitive.

6) It is extremely difficult to reach helpdesk. It takes a long time to respond to issues escalated.

In fact, almost all the issues raised above could have been tackled if the government hadn’t launched GST in a hurry and come up with a simpler system design. Also, system design isn’t really a strong point with the Indian government. This clearly comes out in the answers to the survey. Anyone who has filed his income tax return would vouch for this.

Over and above what the survey found out, the World Bank in a recent report provided evidence regarding the complexity of the Indian GST system. As the World Bank said: “The Indian GST system currently has 4 non-zero GST rates (5, 12, 18, and 28 percent)… Most countries around the World have a single rate of GST: 49 countries use a single rate, 28 use two rates, and only 5 countries including India use four rates. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana. Thus, India has among the highest number of different GST rates in the world.”

The Indian politicians may have their reasons for doing this, but multiple rates, do complicate things for those who need to follow the GST system (remember self-assessment is at the heart of this system).

Take a look at Figure 1.

Figure 1:Other than having too many rates of tax, India also has one of the highest GST rates in the world. As the World Bank pointed out: “Comparing the design of India’s GST system with those prevailing internationally, we note that the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28 percent, which is the second highest among a sample of 115 countries which have a GST (VAT) system and for which data is available.”

Take a look at Figure 2.

Figure 2:Basically, there are too many design issues with India’s GST, making the system essentially complicated for people to follow. To this criticism, people have pointed out that the earlier system of multiple tax rates with no input credit was even more complicated. This is true. But people making this criticism do not get two points.

First, their criticism is valid for the indirect tax system that prevailed on the sale and movement of goods. It is not valid for services. The service tax system was inherently simpler than the current GST, even though no input tax credit was available (but then the rate tax was also lower at 15%). And 50% of the Indian economy is services, is a point which is worth remembering. Also, the service tax had to be paid after it had been collected from the customer. Now, GST needs to be paid, after the invoice is raised, irrespective of whether the GST has been paid or not.

This has led to many a small entrepreneur facing working capital issues, and in the process financing big corporations, which take their own sweet time to make the payment. As a freelance writer, we have been facing this problem at our small level as well. And it’s not a great place to be in.

Second, the entire idea behind GST was to expand the tax base and get more people to pay tax. A complicated system of filing returns goes against this entire idea. In July 2017, the total number of taxpayers who were required to file tax returns stood at 59.57 lakhs. This has since then increased to 1.05 crore. Nevertheless, the total tax collected has fallen from Rs.92,283 crore to Rs 85,174 crore. What explains this increase in number of taxpayers and falling tax collections? The complicatedness of the GST system.

The GST council is handling this in a very piecemeal manner, where they keep coming up with new rules every month, and create a bigger headache for those who have to follow the system. Instead, what is needed is the simplification of the entire system of following and filing the GST. And that is easier said than done because among other things it would mean admitting to having screwed up, which politicians don’t like to do.

Of course, it is unfair to just blame the system design. Tax evasion, as always, continues. But that was always a given. A simpler system would have clearly helped in tackling this.

The column was originally published on April 2, 2018, on Equitymaster

 

 

One Example of How a Good and Simple Tax Should Work

Late last week I was paying the Goods and Services Tax (GST) I had collected on behalf of the government, to the government.

In the process of payment, I made a mistake, which, with the benefit of hindsight I can say was a rather silly one. Basically, the entries for the state GST and integrated GST got interchanged. In the process, I ended up paying more integrated GST than I had to and less state GST than I had to.

Integrated GST is a tax which the seller must collect from the buyer on the inter-state supply of goods and services. State GST and central GST are taxes which the seller must collect from the buyer on the intra-state supply of goods and services.

Let’s understand this through an example. I am based out of Mumbai in the state of Maharashtra. I write a column for a magazine, which is based out of New Delhi. In this case, when I bill the magazine (the buyer), I will raise an invoice with an integrated GST of 18 per cent.

If I write a column for a website (it could even be a magazine/newspaper) based out of Mumbai, then I will raise an invoice with a central GST of 9 per cent and a state GST of 9 per cent. The point to be noted here is that the overall rate of tax in both the cases (interstate and intrastate) is the same. Only the division is different.

Anyway, getting back to my story. Given that I hadn’t paid the right amount of state GST, this meant that I had logon to the GST portal once again and pay the state GST I hadn’t. The integrated GST I had already paid will now get adjusted against the payments that I will make in the months to come. The money is safe. There is nothing to worry on that front.

Of course, I didn’t realise I had made a mistake while paying the GST. It was only when my chartered accountant started filing the GST return, this mistake was noticed. After this, I frantically logged on to the GST portal in order to pay the state GST, I hadn’t. In fact, I almost ended up paying the integrated GST all over again. Thankfully, I noticed the mistake this time around.

In the process of making this mistake I had a rather obvious realisation. As someone who is collecting GST on behalf of the government, it doesn’t matter to me whether I am collecting state GST or central GST or integrated GST. This is something that should work at the backend of the system that has been created to implement GST.

How the GST collected by the government is split between the different governments (central and states) is not something I am really bothered about. Once I have upload my returns and have paid the right amount of GST, the system should be able to figure out, using GST numbers which have state codes and the PAN number of buyer as well as the seller built into it, what proportion of the GST should go to the central government and what proportion should go to the state governments.

Given this, I as a user should simply be making an entry for the total GST that I need to pay. The GST system can then easily figure out, the various kinds of GST, given that each buying-selling transaction along with the value, is reported as well.

But that is not how the current GST system works. The backend has become the front end as well. That is how the system has been designed.

It is well worth asking why? Dear Reader, if you have ever filed an income tax return form on your own even once, you would already know the answer. When the government designs these forms, it does not keep the ease of use of the end user in mind. That’s the idea with which the government has always operated. This has seeped into the GST system as well.

The success of any government system (or for that matter any system) also depends on how easy it is to use. This ease of use will make GST a good and simple tax, which it currently isn’t. In case of the GST, the government has just made the laws. The actual taxes need to be collected by the seller from the buyer. The seller then needs to hand the tax over to the government. The seller also needs to file returns. Currently, this entire process that has been made extremely cumbersome.

I am no GST expert, but I am sure that if some thought was given to the entire process of filing GST returns and paying GST to the government, it could be simplified. But for that to happen, first and foremost what is needed is bureaucratic will, even more than political will.

Indian bureaucrats have never liked to make things simple for the citizens of this country, because a simple system would discourage rent-seeking, which many of them excel in. And therefore, I feel that the GST will continue to be as complicated as ever.

The column originally appeared on Equitymaster on November 21, 2017.

 

 

The Govt Can’t Do Much, If Restaurants Don’t Pass on Benefits of Lower GST

Dear Reader,

If you are on WhatsApp, I am sure you would have got a forward by now, which basically shows that eating out at a restaurant hasn’t become cheap, after the Goods and Services Tax (GST) was cut to 5 per cent.

In fact, there has been a lot of hungama (for the lack of a better word) around this issue, with people demanding that the government take action against the restaurants. Let’s try and understand this issue in detail.

The GST on restaurant bills was recently cut to 5 per cent. Earlier it was 18 per cent or 12 per cent depending on whether the restaurant was air-conditioned or not. Hence, the expectation was that the cost of eating out will come down, with the rate of tax being slashed. Nevertheless, nothing of that sort has happened in many cases. Hence, people have taken to WhatsApp, Twitter and Facebook to highlight this issue.

Before going further, it is important to understand that there is one basic difference between the new GST rate and the earlier GST rates of eating in a restaurant.

The new rate is a flat tax of 5 per cent (and that makes me wonder as to why is it still called GST). This means that no input tax credit is allowed. In case of earlier rates, the tax was a value added tax i.e. input tax credit was allowed. This basically meant that restaurants could claim a set off for the goods and services tax they had paid on their inputs. The inputs in this could be tax paid on dairy products, meat, vegetables etc.

But input tax credit is not allowed now. Hence, the new 5 per cent GST is not a value added tax. It’s just another tax.

Now with the input tax credit not allowed, some restaurants are claiming that the cost of running their business has gone up. This has meant that the pre-GST price of the food products they sell, needs to go up, and in the process, there is not much of a difference in the end price that the consumer is paying for the food products.

McDonald’s India says that with the input tax credit being withdrawn their operating costs have gone up by 10-12 percent. And after taking this increase in cost into account, the effective tax benefit due the lower tax rate of 5 per cent, “would have been less than a per cent.” As the Business Today magazine puts it: “A few restaurant owners… pegged a spike between 7 per cent and 10 per cent in costs.”

The fact that input tax credit is no longer available, hence, there can’t be much of a difference in the final price paid by the consumer now, as against earlier, is a perfectly valid argument to offer, on parts of the restaurants.

This hasn’t gone down well with many people and they have taken to the social media urging the government to take action. They are not convinced about the validity of the input tax credit argument. They feel that this is just an excuse on part of restaurants not to cut prices and increase their profitability. Hence, the government needs to investigate and take action.

The trouble is that the capacity of the Indian government to do anything is fairly limited, let alone going around investigating so many restaurants. Also, it has other more important things to do. Given this, it is not in a position to check the books of accounts of the large number of restaurants. And more than that, it should not even try to entertain any thought of doing this.

What I am saying is that if a restaurant chooses not to decrease price now, it can always offer this explanation of lack of availability of input tax credit, and there is no way to contest the explanation. The government cannot go into the accounts of each and every restaurant in the country in order to establish whether the explanation holds in their case or not. Of course, many restaurants obviously will look at this as an opportunity to make more money and which is precisely what they will do. There is no denying that.

So, what is the solution to this? If you as a consumer feel a restaurant is expensive simply don’t go there. If enough people do that the restaurant will automatically have to cut prices. If people continue going, then the higher price doesn’t really matter to them and they shouldn’t be really complaining.

Also, these are the unseen effects of starting with high tax rates. The trouble with bad economic policy (while GST is not bad policy per se, but its implementation clearly is) is that its ill effects are not always clear from the very beginning. This is now starting to come out in case of GST.

The column originally appeared on Equitymaster on November 20, 2017.

Mr Adhia, GST Needs “Complete Overhauling”, “Some Rejig” Just Won’t Help

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Yesterday evening, the social media was abuzz with a statement that Hasmukh Adhia, the revenue secretary, had given in an interview to the Press Trust of India (PTI) regarding the Goods and Services Tax (GST). As he said: “There is a complete overhauling that is required… it is possible that some items in the same chapter are divided.”

The website of The Hindu still has this report. You can also read it on Scroll.in.
This statement was later changed to: “There is need for some rejig in rates… it is possible that some items in the same chapter are divided.” The interview on the PTI website, currently has this statement and not the earlier one.

The phrase complete overhauling [of GST] has been replaced by some rejig in [GST] rates, by the PTI. Of course, a complete overhauling is majorly different from some rejig, but this is the closest that someone senior in the Modi government has publicly admitted that the implementation of the GST has been a disaster.

There are questions that need to be asked, even though the chances of getting any answers from the Modi government, remain nil.

1) Why was the government in such a hurry to launch the GST, when it was clearly not ready for it. This lack of preparation was already visible even before GST became the order of the day.

As Navin Kumar, the chairman of the GST network, in an interview published on June 27, 2017, told Business Standard: “It should be a stable system. Problems that surfaced during the first phase of the testing have been resolved. We did the testing on the basis of the rules that came in December. After that, some changes were made to the rules. Those changes we have absorbed now, so there is no time to do beta testing for that.”

Here is the Chairman of the network on which the GST is implemented saying that they haven’t had the time to test it properly. What more evidence is needed for the system not being completely ready?

Bharat Goenka, the managing director of Tally Solutions, one of the companies which has made a software for customers to help them file the GST returns, made a similar

In an interview with the Business Standard published on June 23, 2017, he was asked: “Is the problem essentially with the cramped timeline? Is July 1 too optimistic?” He answered: “It is indeed very cramped. While it is easy to add a new feature to software with respect to its functioning, developing robust software takes time. Whenever you make a change, you need to harden the software and that takes time. If you do not give it time, you end up with fragile software and get potentially surprising results. It is a high-risk environment. So, it is not sensible to try and do such mega rollouts without robust backing.

Obviously, the government was in a hurry to launch the GST without adequate preparation. In the process, it ended up creating the mess that currently prevails. And given that concerns were raised by people who were part of the process of the launch, this is clearly not benefit of hindsight.

2) Nearly four months after the launch, a lot of confusion prevails on many fronts. Even the chartered accountants lack clarity on issues. This tells us again that there wasn’t enough communication from the government on this front. In countries where GST (or value added tax as it is more popularly called) has been successfully implemented, an adequate amount of time is spent in training those who will be a part of the system implementing the GST (both inside and outside the government). This, has clearly not happened in India.

3) In fact, much before the GST was launched, analysts had pointed out that there were way too many GST rates, and that made the entire system fairly complicated, for those who need to follow the system.

The examples are now out.  A newreport in The Times of India quotes a supermarket chain owner as saying: “Tax on snacks like aloo bhujia, potato chips, samosa, kachori is 12%. Now the tax rate for cashews is 5%, but I can’t figure out if masala cashew is a snack or a standalone item.”

Similar issues have cropped up when it comes to sweets. Milk sweets come under the 5 per cent bracket, but the moment a silver foil is put on it, tax shoots up to 18 per cent. As Congress leader Veerapa Moily put it: “For example, is Kitkat a chocolate or a biscuit? Is coconut oil considered as hair oil or cooking oil?

A ministry of finance press release towards the end of September 2017 pointed out: “The total number of tax payers who were required to file monthly returns for August 2017 is 68.20 lakhs, of which, as on 25th September, 2017, 37.63 lakh GSTR 3B returns have been filed.” Around 55 per cent of those who needed to file GST returns, actually filed it.

Given the way, in which the system has been designed, this isn’t surprising at all. What this has also brought out is the fact that Indian traders are digitally challenged, and it will take time for them to catch up to GST. Meanwhile, the economy will have to suffer because of this.

4) The multiplicity of tax rates has led to a situation where the tax rates on different products make very little sense.  While the GST on condoms is 0 per cent, that on sanitary napkins is 12 per cent. One explanation provided for this is that only branded sanitary napkins invite a GST. But why even make this distinction? Does the GST apply only on branded condoms? Or more importantly, is there anything like an unbranded condom? These issues will simply not arise if there were fewer rates of tax.

Another explanation provided is that the mandate of the GST Council which decided on the GST rates, was fitment of taxes i.e. the GST rate on a product must be close to the existing taxes on it.

This is a rather silly observation given the status of the GST Council. If the idea was mere fitment any junior level bureaucrat could have done it. The fact that GST Council comprised of the finance ministers of all states and the finance minister of the central government, means that such anomalies could have been easily corrected.

There are several such inconsistencies, for the lack of a better word. The GST on environmentally friendly hybrid cars as well as fossil fuel guzzling SUVs is the same at 43 per cent (28 per cent GST and 15 per cent surcharge). Before GST became the order of the day, the total taxes on SUVs added to around 50 per cent.[i] In case of hybrids the tax before GST was around 29 per cent.[ii] This has led to the companies increasing the prices of the hybrid models of their cars.

And there is more. The GST rates on diamonds and gold are at 0.25 per cent and 3 per cent respectively. But the GST on something as useful as matchboxes (handmade ones) is 5 per cent. Why is this the case? Is it because those who run diamond and gold firms have deeper pockets funding political parties, than those running firms making matchboxes?

5) The rate of tax for most services has gone up from 12.36 per cent in 2014 and 15 per cent till June 30, 2017, to 18 per cent under GST. Of course, a part of this jump was supposed to be neutralised because of the input tax credit available under GST. But anecdotal evidence clearly suggests that the price of services has gone up because of GST. The government needs to study this and if this is true, it needs to cut the rate of tax on services to 15 per cent.

6) Also, the Modi government has tried to implement a convoluted and a complicated GST, which has “privatised compliance”. This has hit the small and medium enterprises(SMEs) the hardest. This also shows that we haven’t really learnt the lessons from our past.

One reason for India’s big black economy has been the high income tax rates over the years. In the early 1970s, the highest marginal rate of tax was as high as 97 per cent. Of course, at such a high rate most people who should have been paying income tax, did not. Not surprising, why would anyone give away Rs 97 out of every Rs 100 that he earned over a certain level, to the government.

The point being that tax compliance is always better at lower rates. At 28 per cent and higher, the peak Indian GST rate is among the highest in the world. Hopefully, as the number of tax rates under GST gets slashed in the years to come, the higher rates will go.

To conclude, GST has hit the small and medium enterprises (SMEs), which were already reeling under the negative impacts of demonetisation very hard. This is something that needs to be corrected very quickly, simply because it is the SMEs which create jobs in any growing economy. As finance minister Arun Jaitley recently told ET Now“Bulk of the jobs in India are created by SMEs, by the micro industries, by self employment. Gone are the days where only the government sector created jobs in the government or the organised sector created jobs.”

And given that one million Indian youth are entering the workforce every month, the country needs SMEs to create jobs more than it ever did before. Given this, the GST needs complete overhauling, in order make it simple and uncomplicated. A simple rejig won’t do. Hope Mr Adhia and his boss in the finance ministry are listening.

[i] A.Modi, Planning to buy a luxury car or an SUV? GST may save you up to Rs 85,000, http://www.business-standard.com, May 21, 2017.

[ii] A. Khan, Hybrid Cars May Become A Thing Of The Past Because Of GST, www.businessworld.in, July 4, 2017.

The column originally appeared in the Huffington Post on October 23, 2017.

Where George Orwell meets Wasim Barelvi 

george orwell
अभी कुछ दिनों की बात के एक मित्र जो के हिंदुस्तानी में थोड़ा बहुत लिखते हैं, उन्होने पुछा के जॉर्ज ओरवेल की Animal Farm में एक पंक्ति है “All animals are equal, but some animals are more equal than others,”  इसका हिंदुस्तानी में क्या अनुवाद होगा.

अब एक तरीका ये था के ओरवेल की इस पंक्ति का सीधे सीधे अनुवाद किया जाए. मुझे ये तरीका बड़ा बोरिंग लगा, क्यूंकि हर भाषा में इतनी गहराई होती है, के कम से कम मिसाल तो उसी भाषा में दी जा सके.
तभी मेरी tubelight हमेशा की तरह देर से जली और प्रोफेसर वसीम बरेलवी का एक शेर याद  आया: “गरीब लहरों पर पहरे बिठाये जाते हैं, समन्दरों की तलाशी कोई नहीं लेता”. इस शेर का भी लगभग वही माने है जो ओरवेल की पंक्ति का है.

ओरवेल ने अपनी बात प्रोफेस्सर बरेलवी से काफी पहले कही थी. क्या ओरवेल की ये पंक्ति प्रोफेसर साब के शेर की प्रेरना है? अब ये तो वही बता सकते हैं.

मतलब इसका ये है, के दुनिया में जो भी कहा जा सकता है, वो कहा जा चूका है. आप बस इतना कर सकते हैं को उसी बात को अपने अंदाज़ में कह सकते हैं. और अपने अंदाज़ में प्रोफेसर बरेलवी ने ये बात खूब कही है.

अब GST को ही ले लीजिये…
Prof._Wasim_Barelvi_(2)

The Other Side of GST

There is a difference between making things simple and making them simplistic. In the zeal to make things simple a significant chunk of media’s coverage on the recently introduced Goods and Services Tax (GST) has turned out to be simplistic.

Here’s how.

There are two basic concepts at the heart of the GST. It has a self-policing feature built into it and it allows for an input tax credit. And both are linked.

Let’s start with the second feature first. What is input tax credit? Let’s say you are a manufacturer. The product you make needs different kinds of raw material. You buy this raw material from other suppliers. When you buy this raw material from other suppliers, they have already paid some indirect taxes on it and these indirect taxes are built into the price that you pay.

In the pre-GST era, you could not deduct for the taxes already paid down the value chain, while you paid your share of indirect taxes. In this way, you ended up paying a tax on tax and hence there was a cascading effect on the final price of the product.
GST subsumes many indirect taxes both at the level of the state governments as well as the central government. And that is a good thing because it actually reduces the number of taxes.

With the introduction of the GST, you can deduct the GST already paid as a part of your value chain, while paying your share of the GST. This is referred to as input tax credit.
And how do you get this input tax credit? As Section 16(2a) of the Central Goods and Services Tax Act, 2017, points out: “Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,–– (a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed.”

What does this mean in simple English? It basically means that anyone claiming an input tax credit for the GST already paid down his value chain, needs to ensure that his suppliers have registered under this Act (i.e. they have a Goods and Services Tax Identification Number (GSTIN)). The individual also needs to ensure that he is in possession of an invoice from his suppliers.

This is the self-policing feature built into the GST. Anyone claiming an input tax credit needs to ensure that all his suppliers are a part of the GST as well. This basically ensures that if any supplier was operating in the informal economy, he now has to become a part of the formal economy by getting a GSTIN. Wherever this chain breaks, the government knows that somebody is not paying his fair share of taxes. So far so good.

Norman Loayza, an economist with the Development Research Group of the World Bank defines informality asa term used to describe the collection of firms, workers, and activities that operate outside the legal and regulatory frameworks or outside the modern economy.” And given this, governments are not able to collect tax from firms operating in the informal economy. The GST is a way of ensuring that these firms become a part of the formal economy and they pay taxes.

Much of the writing in the media has focused on this and passed it as a good effect of the GST, which it is. But saying that it is only a good effect and does not have any negative sides to it, is making things simplistic instead of simple.

Let me explain.

Loayza estimates that in a typical developing country the informal economy employs 70 per cent of the labour force and produces around 35 per cent of the GDP. India has multiple estimates of the size of the informal economy.

Take a look at the following figure.

Source: Boosting Growth and Employment in the BRICS’ Prepared by ILO and VV Giri National Labour Institute, INDIA. September 15, 2016.

As per Figure 1, nearly 67 per cent of India’s labour force works in the informal economy. This touches nearly 85 per cent, if we take the informal workers in the formal economy into account as well. Many formal firms under declare the total number of people they employ.

The India Employment and Labour Report of 2014 states: “An overwhelmingly large percentage of workers (about 92 per cent) are engaged in informal employment and a large majority of them have low earnings with limited or no social protection.”

There are other estimates as well. Nevertheless, most of these estimates put the size of the labour force working in the informal economy at around 75 per cent or more of the total labour force. Also, depending on which estimate you believe the informal economy contributes 35 to 45 per cent of the GDP, which is huge.

The question is why are the firms operating in the informal economy, and not formal? The simplistic answer is that they want to avoid paying tax. And GST will make them compliant on that front.

Many Indian firms operating in the informal economy do so because going formal means following a whole host of rules and regulations, which they simply do not have the wherewithal to follow. The National Manufacturing Policy of 2011 estimates that, on an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. At the same time, these units sometimes need to file as many as 100 returns a year.

Furthermore, India has 150 state level-labour laws and 44 central-level labour laws.
GST will force informal firms to go formal, the question is, will they? It really depends on whether it will be viable for them to do so. Instead of going formal, they may simply decide to shutdown. This is also a possibility, which the media seems to have taken great care not to talk about. How this will play out, no one really knows and only time will tell.

If GST has to be a real success then the ease of doing business in India needs to start improving as well. Nothing much has happened on that front.

If the informal firms shutdown, how is the situation likely to play out? Many people will end up losing jobs and this will have an impact on consumption and economic growth.
Will the smaller formal firms cash in on the situation by expanding their production and recruiting more people? Again, it’s not so easy. The average Indian manufacturing firm is very small. In many cases, it employs even less than ten people.

Many formal firms continue to want to stay small so that they don’t come under the ambit of labour laws. As Jagidsh Bhagwati and Arvind Panagariya write in India’s Tryst with Destiny: “The costs due to labour legislations rise progressively in discrete steps at seven, ten, twenty, fifty and 100 workers. As the firm size rises from six regular workers towards 100, at no point between the two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying these laws.” Panagariya is currently the Vice Chairman of the NITI Aayog.

The situation will end up benefitting the larger firms who will end up capturing a larger portion of the market. And this will give them pricing power as well. Of course, it will mean more taxes for the government, which can then continue with its many boondoggles or create newer ones.

Also, it is worth mentioning here that while the owners of firms working in the informal economy don’t pay taxes, those working in these firms do pay their share. Most of these workers earn lesser than Rs 2.5 lakh. Hence, they don’t come under the ambit of income tax. When they spend the money that they earn they pay indirect taxes. Also, the money they spend is income for firms operating in the formal economy, which then pay their share of income tax.

Given this, simply arguing that all informal economy is bad, is basically a very simplistic way of looking at things. Ultimately, it provides jobs to three-fourths of the labour force and that can’t be ignored. Hence, it is important that the media, economists and analysts, try to explore this other side of the GST as well.

The article originally appeared on Newslaundry on July 12, 2017.