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Arun Kumar, Economist and author

Interview by Richa Mishra  

In his book, Arun Kumar suggests ways to convert the complex levy into a ‘Ground Nourishing Tax’

Change is not always easy to adapt to, especially when it is a completely new tax regime like the Goods and Services Tax (GST), which even proponents of reforms acknowledge is very complex. No surprises then, that it drew more flak than applause when the Narendra Modi-led government initiated the move and made it a reality on July 1, 2017.

Why did the Congress, which claimed it to be its baby, term it Gabbar Singh Tax? And, why does Arun Kumar, an eminent economist, call it a Ground Scorching Tax? Kumar, not known for mincing words, spoke to BusinessLine about the ‘why’, which is the crux of his book Ground Scorching Tax, published by Penguin. he argues that problems with this indirect tax regime are both transitional and structural in India.

  Title: Ground Scorching Tax Publisher: Penguin Price:  Rs. 300

To correct these problems there have been a few hundred notifications and orders, which instead of resolving them have added to confusion, he says, adding that there is a need to design a simple alternative.

“Reform of GST as it stands is essential even to get limited gains. It needs to be simplified. It is time that the political leadership (both ruling party and opposition) takes a wider view of the economy, admits its mistakes and gives up the ‘Ground Scorching Tax’ in favour of a ‘Ground Nourishing Tax’. There is still time to retrieve the situation,” he says in his book. But it is slightly less than two years since this tax regime has come into existence; shouldn’t it be given some time? Weren’t the implications, good or bad, well thought through?

“India is not like any other economy; therefore, the argument given that 160 countries have it and why should we not go for it, is not justified. You see, no other economy has such a large unorganised sector. It is the unorganised sector which is facing the problem because of GST. They are the ones who are unable to cope with it even though they are largely exempt from it. The reason is that GST is a very complex tax. It is levied as VAT (Value Added Tax), which in itself is very complex,” he said.

“VAT requires value of inputs and value of outputs. This is possible when everything is computerised. Small businesses are generally not computerised, they don’t have accountants, they work in a very ad hoc manner,” Kumar states.

A difficult tax

From the LK Jha Committee in 1978 and the Long Term Fiscal Policy Report in 1985 to the Kelkar Committee Report in 2002, all have said that it is a very difficult tax. The Jha committee had recommended ‘MANVAT’ (manufacturing VAT) as VAT could not be implemented fully. But even MANVAT couldn’t be executed because in the manufacturing sector there are lots of small players and they couldn’t cope with it, Kumar points out.

The Arvind Subramanian Committee report in 2015 wanted it to be the best internationally, which could be accepted by other countries, but ended up saying that fixing the tax rates is ‘more an art than a science’, thereby admitting it be very difficult.

All the political parties finally agreed after more than a decade of discussion and opposition from some States, because of the pressure of big business. It was projected as a ‘win-win’ for all. The producing States were worried that they would lose revenue to the poorer States, who are the consuming States. Modi, himself was a strong critic of GST, but after the BJP came to power it quickly moved to implement GST and the Congress could not oppose the same as it was their baby to begin with. GST was implemented with all the ruling and opposition parties on board and was presented as an example of cooperative federalism. But, in all this the interest of the unorganised sectors was not taken care of. “This sector, which employs 94 per cent of the workforce and produces 45 per cent of the output now — it produced more earlier — has been adversely hit today. The point is that if you damage such a large sector, then the overall economy will go downhill and so will employment,” says Kumar.

And, if 94 per cent of the workforce is adversely affected, demand for food will go down, as a bulk of the demand comes from here, he argues, adding that “because demand has come down, farmers’ prices have declined leading to a crisis there.” He further states that the surpluses in agriculture are not because everyone is eating well, but due to the fact that people don’t have the purchasing power to buy. “So, the crisis in the Indian economy today is because the unorganised sector is adversely hit by GST,” he states.

Giving the example of the pressure cooker industry, he says that big players such as Prestige are growing because demand has shifted from the unorganised sector units to them. “That is why I called GST, Ground Scorching Tax — it is at the ground level that the economy is getting damaged,” Kumar argues. GST is based on the input tax credit and reverse charge mechanism. These put the small producers at a disadvantage. “Because of all these components the demand is shifting to large-scale players.”

But even the large businesses are suffering due to complexities in the tax, Kumar says, as “there have been more than 500 changes and orders adding to the confusion.” So many returns have to be filed in each of the States in which the company operates — GSTR1, GSTR2 and GSTR3. More than a thousand returns have to be filed by a company operating pan-India. Fortunately, GSTR2 as been suspended for the time being, but then invoice matching is not possible and that was an important goal of GST, he points out. “Many of the critical components of GST had to be postponed or delayed. To add to the complexity there have been changes in the tax rates.”

While the government argues it has brought in more transparency in the system and facilitated ease of doing business, Kumar writes: “The promised ‘ease of doing business’ is not yet in evidence.” According to him, fiscal federalism is being dented by the idea of “one nation one tax”. The autonomy of the States is being dented and the local bodies are not provided any tax source.

The way ahead

What is the alternative then? Can GST be reversed and can one go back to the earlier system of indirect tax? Clearly not! But there is still time to correct the course and turn it into a ‘Ground Nourishing Tax’, he says.

“First part of the alternative is to collect more direct taxes by curtailing black income generation, for which ideas have been mentioned. This will enable reduction of indirect taxes,” he says.

The second part, according to Kumar, is to simplify the GST regime. GST is a destination tax, paid by the final consumer and also collected by the State where the final consumption takes place. So, GST should be levied only on the final consumption leaving out the intermediate stages of production and distribution like transportation, accountancy and raw materials. “It can be further simplified if it is levied as ad valorem rather than VAT, since at the last point, the two amount to the same,” Kumar says.

Yes, GST gave the economy a shock as it followed demonetisation. “Political will is needed to curtail the black economy. It is a political choice whether to tackle the black economy and reduce indirect taxes or continue as it is with its negative consequences,” summarises Kumar.

Courtesy : thehindubusinessline.com| Published on April 14, 2019

https://www.thehindubusinessline.com/opinion/books/time-to-soften-gst-blow-on-msmes/article26836300.ece

Prof Arun Kumar, Economist- Author, ex-JNU. Malcolm S. Adiseshiah Chair Professor, Institute of Social Sciences, Vasant Kunj, N Delhi 110070. India

e-mail ID:  arunkumar1000@hotmail.com

Blog: arunkumarjnu.blogspot.com


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