“One Tax, One India”: The Gainers and Losers

Archana Prasad

THE launch of the Goods and Services Tax (GST) regime on the midnight of June 30, 2017 has been marketed by the Modi government as a big ticket reform that will benefit all stakeholders. In its media blitz to justify the measure, the government claims that the GST would “help to create a unified common national market for India, giving a boost to foreign investment and “Make in India” campaign” and reduce the overall burden of the indirect tax burden of the consumer. Further the principle of treating all producers, small, medium or large, as equal in terms of their ability to compete within the open market has raised questions about who would benefit, and who will be the big losers from the GST system. This question can only be answered if the inequalities within the Indian commodity and labour markets are recognised while visualising the impact of a uniform and standardised tax regime.

INEQUITIES AND INFORMALITY

Recent data shows that there is growing informalisation of manufacturing, trade and other services. The industrial economy of the country consists of incorporated and unincorporated enterprises. Incorporated enterprises are those which have been recognised as private or public corporations under the Companies Act. The rest are unincorporated enterprises most of which fall under the informal sector. Within this framework about 0.3 per cent of the enterprises in the non-agricultural sector can be termed as registered ‘organised sector enterprises’ as per the relevant data collected by the National Sample Survey Organisation (NSSO) and Annual Survey of Industries (ASI). Between 2011 and 2016 this proportion grew only by 0.03 per cent. Only one fourth of the total number of companies is registered while only 30 per cent of the unincorporated enterprises are registered under the Factories Act. Overwhelming number of enterprises ie, about 61 per cent of the enterprises remain unregistered under either the Companies or the Factories Act. Another important feature of the enterprises, particularly unincorporated enterprises, is that they are very small in size. About 84.2 per cent of the entire non-agricultural unincorporated enterprises are “own account enterprises” or enterprises where the worker-owner works/himself or herself in the enterprise with the help of family or other unpaid labour. As per the NSSO survey, such enterprises seldom use hired labour or use it very sparingly in times of seasonal requirements. This proportion has not altered much between 2011 and 2016. The smallness of the enterprises can be gauged by the fact that the average number of workers employed per enterprise in 2011 was 1.42; but this reduced to 1.28 workers per enterprise in 2015-16. This shows that rather than expanding, most enterprises are shrinking in size and are largely single worker unregistered enterprises with small turnovers, where as the registered incorporated and unincorporated enterprises are fewer in number but control greater capital and contribute more than 60 per cent of the GDP. A study done by the ministry of finance in 2015:

Distribution of Taxpayers by Sales Turnover, 2013

Range of Turnover – Rs.

Number of taxpayers

Percent of total

Total Turnover Rs. Crore

Percent of total

0 to 10 lakh

6433903

68.20%

84964

0.40%

10 to 25 lakh

682859

7.20%

111751

0.50%

25 to 40 lakh

325974

3.50%

103662

0.50%

40 lakh to 1crore

668290

7.10%

446671

2.00%

1 to 2 crore

503093

5.30%

712837

3.20%

2 to 5 crore

427039

4.50%

1341213

6.00%

5 to 10 crore

186931

2.00%

1307752

5.80%

10 to 100 crore

185503

2.00%

4692026

20.80%

Above 100 crore

18316

0.20%

13726108

60.90%

 TOTAL

9431908

100.00%

22526984

100.00%

Source, Ministry of Finance: Report on Revenue Neutral Rates and Rates for GST, 2015

The table shows that approximately 93.5 per cent of the turnover is controlled by only 8.7  per cent of taxpaying enterprises where as about 79 per cent of the taxpaying enterprises control less than 1.5 per cent of the entire turnover. This shows the glaring inequality in the income generated and assets controlled by different types of enterprises. A large number of single worker owned enterprises are likely to fall under the first two categories and are at an absolute disadvantage as far as the control over commodity markets are concerned.

WHY THE UNREGISTERED AND SMALL ENTERPRISES WILL SUFFER

The introduction of GST should be seen in this light because the Act mandates that all goods and services produced by registered or unregistered enterprises must be taxed at source. It requires that all the 63.4 million unincorporated enterprises register themselves, and that too online, in order to comply with the GST Act. This means that about 45 million small and micro enterprises (more than 60 per cent of which have no online access and use traditional methods of accounting) will be forced to bear the extra costs of developing infrastructure for online registration in order to comply with the GST Act. As a study done by the World Bank Group shows, the tax compliance costs of VAT and GST regimes in developing countries constitute 3.15 per cent of the total cost of production for micro and small enterprises, where as they constitute of only 0.5 per cent of the total cost of production for large enterprises. This means that the small enterprises will have to bear most of the costs of the implementation of GST as many of the large enterprises already possess this infrastructure. The question then is whether the government is willing to subsidise the cost of developing this infrastructure – probably not, as all indications are that the government will only give training and no financial support. This is evident in recent public announcement that the government will hold a three hour training class on GST on State owned Doordarshan channel and set up 100 Kiosks to help these enterprises. But such inadequate measures are unlikely to reduce the costs for already precarious small enterprises.

So what happens if a majority of the unregistered vulnerable enterprises are unable to register with the GST council? The provisions of the GST says that if a registered enterprise buys goods from an unregistered enterprise than the recipient of the goods/services (that is the registered buyer) will have to pay the GST which the supplier should have paid. This ‘reverse charge’ is in fact a disincentive to buy from unregistered enterprises, especially in times when many of the big players in the apparel, electronics and automobile sectors are in fact outsourcing their production to small units in order to reduce their costs. If they have to pay the GST for the small enterprises, they will naturally transfer the cost to the small supplier by deducting the taxable amount from the total contract. In other words, the structure of the GST system will make changes in commodity markets in a way that will allow big players to set the terms and make new rules of trade with small enterprises.

The second way in which small enterprises will suffer is in terms of rising input costs for supply side inputs. For example, in the textile industry only 4 per cent of the fabric is produced in composite mills and the rest of the fabric is purchased from small producers. By putting 18 per cent tax on synthetic yarn, the cost of production of synthetic fabrics (often purchased by lower middle class) will go up. The question is not only whether the cost will go up for the consumer, but whether the increase in cost of production for the suppliers of fabric would decrease their profit margins and put their survival at stake, as once again the big players would have an upper hand in setting the prices. Similarly the input costs of the auto ancillary sector are likely to go up as the tax on auto spares rises from 12 to 28 per cent. Again, power equations between the small and big players in the automobile market will come into play while setting the terms of trade and prices within the value chains.

Given these concerns, it is important to understand the way in which the GST system will change the commodity and labour markets. Given the structural inequities and power relations within these markets, the GST is unlikely to benefit small and micro enterprises at the lower end of the market. It is thus necessary to do transparent cost-benefit audits of GST through a transparent and participatory process, so that democratic mass organisations can raise the issues and concerns voiced by the working people within this pro-big business system. 

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