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Modi’s GST

Modi’s GST

The first week of the New Year has barely passed. Yet, we are heading towards a more chaotic situation. There seems to be no respite to it, at least in the near future. Even before we could come out of the shock the incidents of violence caused over the Citizenship Amendment Act, attacks on the Jawaharlal Nehru University students sparked another controversy. The government and law enforcement agencies are unable to mollify the protestors. Nor do they seem to budge from their stand. No one in the government wants to clarify or listen to the issues people have been raising. 

The news from the economic front is not good, either. There is a consistent fall in the GDP number. Recently, the International Monetary Fund too, expressed its concern over the current economic crisis and has urged the government to take urgent policy initiatives.

Niti Aayog’s ‘SDG Index 2019’ shows that 22 out of 25 states have shown a steep fall in performance on three major sustainable development goals (SDGs) – No Poverty, Zero Hunger and Reduced Inequality. 

The report is only a scorecard. It does not go into the details of this colossal failure. Nor does it give any recommendation. In other words, the government’s think-tank could not think beyond the given numbers. Or, should we think, Niti Aayog could also not find a solution as the problem seems to be way too complex. 

Similar reports have been coming up off and on. However, the government has tried to push them under the carpet, be it the unemployment figures, consumer expenditure, GDP data or even the census data.

The findings are in stark contrast to a 2018 report published by UNDP and Oxford University. The report showed that India had lifted close to 271 million out of poverty from 2005-06 to 2015-16. In other words, we are now on reverse gear. We are becoming a poorer nation. Niti Aayog has based its report on the country’s performance on 62 indicators during 2018-19. The data has been compared with the base year 2017-18.

To add fuel to the fire, it is now established that Goods and Services Tax (GST) Act, which was supposed to be the messenger of the much-discussed “Good days” has failed to deliver. Of course, many economists and journals like this one have been voicing their concerns but the government has not given any patient hearing. 

In fact, people have proved to be smarter than the government could even think of. They have shown how they can still make black money just by exploiting the loopholes. 

By the government’s own estimates, the exchequer has suffered a loss of Rs. 45,682 crore by the mid of the last financial year. If one goes through different newspapers, one would invariably find cases of fraud Input tax credit (ITC) being detected. Input tax credit allows the taxpayer to claim credit on the taxes paid on purchase.

The most recent is that of Mumbai-based Pravin Kumar Prajapati, director of a pharmaceutical company. The director had opened 17 fake firms and availed of ITC amounting to Rs. 158 crore. All the firms were controlled by his family members. He had done a large number of transactions without supplying goods, albeit to increase the turnover of a few companies. One transaction was rotated amongst these companies in a circular manner to avail and pass on inadmissible ITC.

One of the very first cases that came up was that of Rajesh Jindal and Adesh Jain, who took KYC papers from poor people for a small consideration and registered many sole proprietorship firms in their names for issuing GST tax invoices. The government should have realised the deficiencies at that time itself. 

In fact, there are blogs, which tell people how to detect a fake GST number or a fake GST invoice. It is something akin to testing the genuineness of a currency note. And if one searches on twitter with the keywords “GST fraud”, you will find a large number of people writing complaints almost every day about a fake invoice or GST number.

In fact, ITC is not the only way of evading GST. If a person holds more than one PAN, it becomes easier for him/her to avoid taxation. He/she can easily get as many GST registrations as the number of PAN cards and raise invoices with different PAN and avail the benefit of the threshold exemption.

Another way of reducing tax liability is to quote the wrong HSN code. For instance, a person may be selling an item with a higher GST rate but he/she may quote a different HSN code, which is similar to the product being sold but with a lower GST rate. However, it is not easy to detect these cases.

The government is now in a fix. When GST was introduced in July 2017, the Union government promised that the state governments would be compensated for the revenue loss till 30th June 2022. 

The situation now is such that the government is not able to collect adequate revenue from GST compensation cess. In fact, it is close to 40 per cent less than what was expected. There has been a gap in the timely release of GST compensation to the state governments. Simply put, the Centre is suffering due to rampant frauds. The state governments, too, have a lesser flow of funds in their kitty to think of any development plan.

In such a situation, how will we restart economic activity? From automobile to telecom to power sector, industry is already suffering from revenue loss. The banking sector is not in the pink of its health. So is the real-estate sector. The small trader or businessman is not able to make money, all thanks to demonetisation and the ill-thought of GST. In such a scenario, the government is unlikely to achieve its target.

To put it straight, the government has committed suicide by launching GST at a time when neither the framework was ready nor the country was prepared to accept this change. The feature that could have helped in implementing GST effectively was put on hold for more than two and a half years. 

It was only in October that online matching of invoices was launched. However, for a trader, it is again a tedious task to ensure that the vendor from whom he/she purchases material also files his return. Lest he forgets/omits, he/she is bound to suffer a loss.

To add to its complexity are the multiple GST rates. Vijay Kelkar, former finance secretary, one who conceptualised GST, had always held that GST would work best as a single rate, rather than multiple slabs. He opines in one of his books that “a single 10 per cent rate applied on 70 per cent of the economy would generate 7 per cent of GDP as tax revenues and even if we actually obtain a part of this, we are broadly okay.” 

That may be true under many assumptions, but it may resolve many issues. A higher GST rate on many items is degenerative. In fact, both the vendor and the customer may be tempted to save money, which comes to a little more than one-fourth of the total cost. And there are several ways of doing that.

In fact, the law should be simplified for easier and effective implementation. There is an immediate need for collaborating with various agencies, including the Director General of Foreign Trade and the Central Board of Direct Taxes. Of late, it has been established that certain exporters enjoy star status. They have been availing various exemptions while avoiding GST easily. 

For instance, an exporter with over Rs. 50 crore of exports of readymade garments took a refund of Rs. 3.90 crore while the entity had paid only Rs. 1650 as GST! Not only this, some of the exporters are not even traceable on the addresses mentioned. Such issues cannot be resolved until the left hand knows what the right hand has done.

It is equally important to plug the loopholes and rethink the entire law to ensure its effectiveness. It is true that GST alone cannot bring people out of poverty or reduce income disparity or inequality. It can certainly be an enabler in rebooting the economy in its Modified version.

(The writer, a company secretary, can be reached at jassi.rai@gmail.com)

(Published on 13th January 2020, Volume XXXII, Issue 03)