The tax laws of America are considered to be among the most complex in the world, giving a field day to their tribe of attorneys. An ordinary corporate tax return of an American company is said to run in a few thousand pages. The individuals too are confused by the byzantine tax laws that they face. With such difficult tax laws and high tax rates, it dissuades even the homegrown American companies form being based in the US. No wonder, those with options and resources including the likes of Google, smartly shift their tax base out of the USA. It is estimated that due to such shifting of base, America has lost tax revenues of about a trillion dollars. The corporate mavens there have been beseeching the White House to simplify and reduce taxes. President Trump has finally taken note of this tax scourge and now proposes to simplify the American tax code, reduce taxes and to raise the threshold of taxable income, to give relief to the harried tax payers there. A similar situation prevails in India and needs urgent respite. To state the very obvious, our taxation laws are simply too complicated, the tax rates are high and come with the added cost/curse of corruption. Tax compliance for an ordinary entrepreneur is just not possible without the services of a consultant. The joy of earning begets the complex burden of taxes, which are onerous and are not simple to pay. If the recent years are an indication, with amendment after amendment, our tax laws have become even more tough to interpret and comply with. While the government gloats over the figures of the rising tax base, it overlooks the crying need to simplify and to resist from the impulsive changes inflicted in the tax code. The very fact that the tax department loses most of its appeals in courts, evidences that the administration of tax laws is not fair and unbiased. In recent times with the massive investigation being conduced by the tax department due to the leads thrown open by the demonetisation saga, there has also been a perceptible change in the attitude of the taxman. Even an ordinary tax payer is seen as a tax evader and dealt accordingly. A transformation is needed in the tax laws and the tax administration for India’s growth to resume its northbound trajectory.
With the politically sensitive Gujarat elections looming on the horizon and the detractors like Yeshwant Sinha giving ammo to the Opposition to target the government, in the wake of a fall in the GDP growth, in addition to the PM’s aggressive defence of his performance on the economic front, it was imperative to modify the GST, to set right the glitches and errors visible due to the hundred days of its implementation. It was time to recognise the ground level experience of three months of GST, which revealed its errors and pain points. These included a need to rationalise the GST rates and the apparent inconsistencies therein, to reduce the burden of compliance on the small enterprises, to bail out exporters whose massive refunds were stuck in the system, to grant input credit to the manufacturers and to dispel the lingering fear of opening of past records, in the case of those who joined the tax regime for the first time. In a timely move the national GST Council in its twenty second meeting has recognised these difficulties and in order to provide immediate interim relief, has modified the GST regulations, It however cannot be denied that the changes reflect the ruling party’s anxiety over the forthcoming Gujarat elections, having provided relief to the textile, jewellery and food items segment, the mainstays of the Gujarat society/economy. In a much needed relief, the small businessmen who were facing problems in filing monthly GST returns, have now been permitted to do so on a quarterly basis. The threshold of the composition scheme which gives relief to the small tax payers, has been increased from Rs.75 lacs to Rs.1 crore and the reverse charge mechanism has been deferred till March 31, 2018. The massive pending tax refunds of the exporters, which had blocked thousands of crores and was obstructing their business, will be cleared in the next two weeks. A marginal GST of 0.10% will be levied on merchant exporters until March 31, 2018 and will be reviewed thereafter. In order to mitigate the blocking of funds of exporters, an E wallet facility will be available to them from April 1, 2018. While the GST rates have been reduced on 27 items, yet in order to avoid any adhoc changes in the GST rates, it has been decided to set up a committee to frame the principles to reduce rates, depending upon the emerging GST patterns. The changes in the GST are welcome and are expected to set a trend of such amendments, based on the overall picture of GST and its administration/compliance that will emerge in the coming years. The difficulties that a producer/consumer may face due to any irrationalities in the law must be removed at the earliest. Moreover the transition pain caused by the onset of the GST too will be mitigated if the changes are timely and rational, without the temptation of any political agenda therein.
GST AND THE SMALL ENTREPRENEUR
India has a huge unorganised sector, which is called its informal economy. It generally consists of SMEs/small time traders/brokers/intermediaries, who operate in a limited geographical territory, with limited resources and small turnover arising from niche clientele. Their turnover may be small, but the number of such enterprises is huge. This informal economy, accounts for over 50% of our GDP and generates 80% of jobs in the country. The unorganised sector thus is the real India. It impacts a majority of our population and is verily the real economic lifeline of India. This sector of society, being of limited resources, survives by cutting costs and operating on thin profit margins and often has no resources to comply with extensive regulatory norms and regulations. Due to their non compliance, they are labelled as tax evaders, but if you see their reality ie. if they had the resources to engage consultants for advise and compliance, they would be above board, Yet, in their small/niche domains, they provide livelihood to hundreds of millions and represent the most dynamic/vibrant section of our economy. The onset of the GST will gravely impact this sector and threatens to throw lacs of such enterprises out of gear. Due to their small turnovers and lack of resources to bear the cost of compliance, as also the cashflow to pay taxes and the resultant tax burden, these enterprises face the danger of closure. The chain of entrepreneurs who will receive a huge setback due to the rollout of the GST, include small time manufacturers and the wholesalers/retailers who deal with them. The business of the informal sector, will go over to the formal sector, in large numbers and will hinder the livelihood of this most vibrant but vulnerable section of our society. This segment is ill prepared and is utterly confused and GST will fatally distress many. They need to be given a moratorium period and given baby steps to walk into the GST realm, together with a higher threshold of exemption from GST compliance. India loses little by giving such a deserved leniency to its informal economy, but without it, small time entrepreneurs may lose it all.
India’s most disruptive and transformative tax reform since independence, which promises to make Bharat, a ‘one tax, one market, one nation’, has finally seen the light of the day, after a controversy ridden midnight session to roll it out. An effort to have a uniform tax law in 29 states and 11 union territories and to abolish/subsume numerous decades old laws therein, is a gigantic task indeed. The enormity is best displayed by the fact that India generates over 350 crores invoices each year, which will now be the subject matter of GST uniformity of rates, legislation and regulation. It has dawned after over fifteen years of the GST law in the making, by build up of consensus among disparate political parties and diverse sections of society. Stitching together a diverse polity from Mumbai to Manipur and Leh to Laksadweep is not an easy task, particularly where these regions have been administering their own tax laws since decades. While the start of the effort may have been seeded in contentious and fractious politics, the end was not, as is evident from the eighteen meetings of the national GST Council, where every decision was driven by consensus and needed no voting thereon. While the government has sought to enact a simple law and the devil may not be in the details, but it certainly will be in its implementation and the transitory phase. But the transition phase of emerging from one law into another, ushers in a huge change and is bound to be painful. The government focus should be to reduce this period of painful transition to the minimum and to mitigate the losses/hardship of the small entrepreneur, who are the most ill equipped to implement the change and have the most to lose. The GST law will certainly reduce the ‘cash/black’ sector of our economy, which chooses to operate below the radar and evades an entire range of taxes, both direct and indirect. It will reduce the pain of compliance with multiple tax laws in numerous states and ensure a pan India seamless movement of goods. The GDP is bound to go up, due to the removal of irritants/barriers to trade. But that would be visible only about two years from now. Till then the country needs to bear and endure the pangs of transition, particularly mindful and sensitive to the hardship to the small entrepreneur.