Why Jaitley is wrong to equate GST phobia with fear of mobile phones when they were first introduced

Finance Minister Arun Jaitley got it horribly wrong when he said on July 15, “People are GST-phobic in the same way they were of mobile phones initially but slowly grew comfortable with them… They realised it is a boon and a mobile revolution took place.”

It is true that when mobile phones first entered India in 1995, there were people who shunned them for innumerable reasons, including because they found the technology daunting. But mobile phones certainly did not spawn phobias. To possess one was an individual’s choice, to not own one did not have an impact on a person’s earnings or alter market behaviour.

By contrast, the transition to the Goods and Services Tax is mandatory and has certainly disrupted the market’s rhythm. This is partly because GST has been projected as an omniscient technological system capable of detecting even minor tax evasions. Jaitley has warned, “Those who are dishonest will have obvious problems with GST because they will be caught soon.”

The GST is India’s biggest ever tax reform that subsumes a range of central and state taxes. It was introduced from July 1. Given that it is common for businesses in India to attempt to skirt around the country’s taxation system, statements such as Jaitley’s have only aggravated the fear of GST, slowed the market, and traumatised the less educated traders engaged in the production and supply of goods.

Jaitley has to only speak to Bache Lal of Ramnagar, Varanasi, to realise how inapt his analogy is.

Confused about GST

Bache Lal was once an artisan who fashioned miniature animal figurines out of soft stone. Varanasi is famous for these handicrafts. He has now graduated to commissioning work from other artisans, whose products he sells to exporters and to customers elsewhere in India. He, therefore, has a fine sense of the entire production chain.

“There has been no work for nearly a month now,” said Bache Lal, speaking last week. Trade had slowed even before GST was unrolled. “It is hard to get soft stone. We sell maximum between September and January. If we do not produce now, we will take a hit in the months to come. Unlike me, artisans cannot tide over rough times.”

Varanasi’s demand for soft stone is largely met from Madhya Pradesh.According to GST rules, acquiring a GST number is mandatory for those who engage in inter-state trade. Thus, their suppliers must have one. However, they have either applied late for it or are biding their time to judge the vigilance of the GST regime.

Nevertheless, artisans have been terrified into believing they must possess a GST number. This is not true, as this clause applies to those with an annual turnover of over Rs 20 lakh. Similarly, the artisans also believe they must acquire a computer, which is not the case either. “But it is hard to allay their fears,” said Mohd Mugeer Khan, an exporter in Varanasi.

Unfounded fears are likely to ebb with time. But illiteracy will create a host of other problems.

‘A spider’s web’

To make a six-inch elephant statuette, artisans require a piece of soft stone measuring 6 inches x 7 inches x 5.5 inches. These blocks cost Rs 300. Since they attract 12% GST, an artisan will now have to pay Rs 336 for it, of which Rs 36 is tax. Under GST, Rs 36 is the artisan’s input credit, or the money that will be deducted from the amount of tax he will be liable to pay the government when he sells the statuette.

A completed stone statuette of that size is usually priced at Rs 700. The artisan will have to add 12% GST, or Rs 84, to his price and claim the input credit of Rs 36. Since input credit is available only to a person having a GST number, the artisan cannot avail of it. When this was pointed out to Santosh Gupta, an artisan, he said, “If I could understand this, do you think I would have been earning just Rs 10,000-Rs 15,000 a month?”

What will Gupta do? He will go to a person like Bache Lal and sell the miniature for Rs 784 (cost price of Rs 700 + Rs 84 as tax). Under GST, the purchaser (Bache Lal) will have to pay the tax of the non-GST seller and claim reversal of charges, which takes less than a month to process.

But the reversal of charges mechanism requires enormous work. Bache Lal has 20 artisans supplying him with statuettes. This means he will have to prepare serially numbered tax invoices (called self-invoicing) and serially numbered payment vouchers for the purchases made from artisans. Thus, a single purchase from each of the 20 artisans will have Bache Lal prepare 40 sets of invoices.

(Photo credit: AFP).
(Photo credit: AFP).

This is precisely why Rakesh Gupta, a chartered accountant in Delhi, said, with a touch of dark humour, “The reverse charge mechanism is like the spider’s web. Traders should approach the prime minister and say, ‘Sir, increase our tax by 3% but please abolish the reverse charge mechanism because of the documenting involved.’”

The irony is that Bache Lal will not able to claim reverse charges. This is because he has decided to opt for the Composition Scheme under the GST regime, which allows businesses having an annual turnover between Rs 20 lakh and Rs 75 lakh to file quarterly returns instead of monthly returns that he would otherwise be required to fill. However, under the Composition Scheme, input credit and reverse charges cannot be claimed. A flat 1% tax is instead levied on the total turnover. But Bache Lal, like all others who opt for the Composition Scheme, will still have to prepare 40 sets of invoices to file their returns.

Is it fair to impose such a mechanism on Bache Lal, who has only studied up to high school? This is more so as the reverse charge mechanism does not, obviously, increase the state’s revenue.

Exporters working directly with artisans will also have more paperwork to fill.

Sushil Tibrewal, an exporter based in Bhadohi, Uttar Pradesh, farms out the weaving of carpets to contractors, who charge around Rs 35,000 for a 900 sqm carpet. Tibrewal said, “These contractors say they will work on cash, regardless of GST.” This means elaborate documenting for Tibrewal, too, to get charges reversed.

The extensive documentation might just drown Shabbir Ahmad Khan, a carpet exporter based in Jaipur. He contracts work to 100 weavers. This means he must prepare 200 sets of invoices to file his returns under the GST regime. “Unlike others, exporters get a reversal of charges after months,” said Khan. “It is a huge headache and it locks my capital.”

Indeed, it does seem as if the Union government’s slogan of “minimum government, maximum governance” has morphed into minimum government, maximum work for people. The government has belatedly said that the reverse charge mechanism will not apply on daily expenses of Rs 500, perhaps too little to matter.

Jewellery and automobile spares

Small players in the jewellery sector are likely to be affected too. For decades, the business of jewellery and precious stones has been structured differently from most. The supplier would hand over his high-value goods to the dalal (broker) to show them to shopkeepers. Once a shopkeeper made his selection, the supplier would raise a bill in the shopkeeper’s name. Payments were often subject to sales, but the dalal could receive his commission from the supplier immediately. There can be different terms of agreement between the supplier, the broker, and the shopkeeper.

Under GST, 3% tax will be levied every time jewellery passes from one hand to another, even those headed for exhibitions. But even at the rate of 3%, the tax on jewellery worth Rs 20 lakh works out to Rs 60,000.

Jewellery manufacturer Rajiv Arora, president of the Federation of Rajasthan Exporters, said, “This tax is reversible and, therefore, not a problem for big suppliers and retail stores. But it is unacceptable to jewellery shop-owners in smaller cities and towns.”

It was in Ludhiana that Jaitley compared the fear of GST to that of mobile phones in the past. His words of comfort have not dispelled the gloom of the city’s dealers of automobile spare parts. Business has been slow and the anxiety of dealers acute.

“Several automobile manufacturers have not opened outlets for spare parts,” said JP Singh, the president of the association of automobile spare parts dealers. “The demand for spare parts is, therefore, met by manufacturers operating in the grey or generic market. They work with small margins and operate in cash. If dealers do not follow suit, they are sunk.”

Apart from 28% GST on the automobile sector, Ludhiana’s other cribs echo those of other cities – computerisation and its cost, poor technology skills, the time involved in accounting for every item sold, the hiring of more hands for that task, the intricacies of reporting and elaborate documentation, the hurdle that illiteracy is in the GST regime, and the menacing remarks of officials and ministers.

For GST to become successful, it is largely the people who will have to expend their time, energy and money. Their efforts, in no small measure, will swell the state’s exchequer. By contrast, people bought mobile phones for their own convenience and also because they did not have to wait for years to get a landline. This is why Jaitley’s comparison between GST and mobile phones is so inapt, so indifferent to the trauma people are experiencing in migrating to the new tax regime.

This is the concluding part of a three-part series on the Goods and Services Tax. Read the first two parts here and here.