Hasmukh Adhia’s ‘GST needs rejig’ realisation has come at a huge price

This is as close as the Revenue Secretary can get to saying that the implementation of ‘tax reform’ has been a disaster.

Four months into the rollout of the “biggest (indirect) tax reform” in the history of independent India, the fizz has all but disappeared from the GST, or the Goods and Services Tax. While Prime Minister Narendra Modi has been compelled to “share the credit” of the GST with Congress, and other Opposition parties in order to distribute the blame, unfairly, we have the Revenue Secretary Hasmukh Adhia now saying that the GST may be in need of a “rejig”.

Adhia has said “GST needs rejig to cut burden on small businesses”, in the wake of hue and cry and umpteen protests by small traders, many of whom have been driven out of business, thanks to the complicated tax structure and the employment woes it has caused. Adhia has issued a caveat that the “rejig would require some calculations by the fitment committee, which will decide which items need a rationalisation of rate under the GST regime which kicked in from July 1”.

Effectively, this is as close as Adhia, as the Revenue Secretary and top bureaucrat in the ministry of Finance, can get to admitting that the conception (in its present form) and the implementation of the GST have been disasters. In fact, this roundabout nod to acknowledging the GST woes are in line with what the BJP stalwart and former Union finance minister Yashwant Sinha had underlined in his scathing oped as well as in myriad interviews he had since given on the “economy poised for a hard landing”.

Adhia has indicated that the government is “planning steps to ease GST compliance burden on SMEs”, or small and medium enterprises. The Revenue Secretary has also hinted that the “simplification process may result in some readjustment of GST rates, including a possible reduction in tax of some items that are in the highest tax slab of 28 per cent”.

“There is a need for harmonisation of items chapter-wise and wherever we find there is a big burden on small and medium businesses and on the common man, if we bring them down, there will be better compliance,” Adhia has reportedly said.

As many business journalists and economic observers have already pointed out, GST had shifted the compliance burden on the individual, thus “privatising compliance”, while creating a system of several slabs that made the GST a clumsy and cumbersome failure, impacting the informal and quasi-formal sector the hardest.

According to Mint, “[A] little over 3.94 million assessees paid the GST and filed returns for the month of September, slightly more than the 3.76 million returns received for the previous month. The finance ministry had earlier said that it had expected 6.8 million returns for August.” This flies in the face of the government’s ambitious claims that GST would increase revenue via indirect taxes by many folds.

On the other hand, GST hit the small traders, in fact the BJP’s biggest political supporters, miring them in labyrinthine maze of taxes and slabs, and requiring everyone to shift to digital compliance overnight. In fact, GST became a “tax nightmare”, and as DailyO columnist and India Today Hindi editor Anshuman Tiwari has meticulously documented, this showed that “poor planning toppled” what could have been a transformational tax reform, and certainly was in its original conception, before the Narendra Modi government decided to implement it even though the country wasn’t ready.

Tiwari writes: “It was not just technology or economics that botched up GST, but also BJP’s own failure to connect with the nature and needs of India’s gigantic domestic trade sector when it got on to designing the mega tax reform… Politically speaking, GST was targeted towards BJP’s strongest constituency of small businesses and traders as big corporates were already tax-compliant… Loaded with draconian compliance rules, including cumbersome registration and returns provisos, the first piece of GST legislation sent chills down the spines of BJP’s trader vote bank. Against the hopes of a modern, simple and far-sighted tax system, the model law had set the course for a potential tax nightmare.”

Adhia’s statement that GST needs some rejig is therefore too late and too little. The economy had already suffered a big blow when the demonetisation diktat sucked out 86 per cent of liquid currency from the system in November last year, and dipped by two percentage points to 5.7 per cent GDP growth rate from 7.9 per cent a year back. That both demonetisation and GST hit the unorganised sector the hardest, a sector that’s responsible for 45 per cent of the GDP and 90 per cent of the employment opportunities in the country, says a lot about the government’s priorities.

Not only SMEs, even some in the automobile and transport sector have been hit hard.

Though Adhia has said a rejig is needed, he has added that no “overhaul” of the GST is in the works. This means only cosmetic changes and some tweaking of the messy tax slabs and the excessively tangled classification of goods under different slabs would continue to harass the small and medium entrepreneurs, who effectively form the backbone of Indian economy.

Even though the GST Council is reportedly working on the concerns of the SMEs, the partial rollback earlier this month meant that what was truly transformational in theory had been done away with. As Tiwari notes, “Enhancing exemption limit under composition scheme and making provision for quarterly instead of monthly returns for businesses up to 1.5 crore are the two major compromises the GST Council had to acquiesce to in its 22nd meeting. This will push almost 90 per cent of the businesses out of monthly compliance and will leave GST regulations applicable to only 10 per cent assessees. No surprise if even biggies are moved to quarterly returns soon. Quarterly returns will make real-time invoice matching and tax credit delivery impossible, thus making the GST similar to the predecessor system except for higher taxation on consumption.”

With PM’s two biggest gambles leaving the economy in tatters, such tweaks aren’t likely to soothe the rising public anger.