Are political considerations altering GST’s structure?

Carefully crafted rate reductions and exemptions by the Goods and Services Tax (GST) Council, and several times over in the span of a year! Gone are the days when businesses and housewives remained glued to the TV screens on the annual Budget day for the finance minister to unveil goodies. Now, goodies come their way on frequent intervals and most often elections decide the frequency.

Since India is a country where elections are held in one or the other state round the year, the GST Council comes with bounty as many times. Agenda of the GST Council meetings are set and reset based on how effectively it will help, not the stakeholders but the political masters. A one-and-a-half year down the line, has India’s biggest economic reform for masses been reduced to serving political aspirations of just a few?

The recent defeat of BJP in Assembly elections in three major Hindi heartland states and the general election a few months from now has brought the focus more on GST. The frequency of the GST Council meetings has been increased and the Council appears to be more accommodative. Decisions are being taken at a faster clip and matters pending for months have been dug up to bring them to a definite conclusion. The Council, which did not hold a meeting for four months prior to December 21, met twice in between December 22 and January 10.

Rate rationalisation for goods and services and bringing in new exemptions were the only agenda in these meetings, which hardly discussed procedural bottlenecks and core reforms. No doubt the new tax regime has given the government enough handle to tinker with indirect taxes without having to seek Parliament’s approval. The GST Council is the supreme authority to decide on tax rates. The latest GST Council meeting handed out a pre-election gift to small and medium enterprises by allowing businesses up to an annual turnover of Rs 40 lakh to remain out of GST net and not pay any tax. The limit was earlier Rs 20 lakh. It was doubled at one go and Finance Minister Arun Jaitley said there will be nil burden on the exchequer. There may not be many buyers of his mathematical calculation and economists will surely sit back to do more analysis of the fiscal implications of the decision. But, the problems of MSMEs have been persisting since the time of demonetisation in 2016 and GST in 2017.

Worse, the government is on record saying in the last two years there was no assessment of the impact of demonetisation on businesses but the finance minister has admitted he has been flooded with complaints from small businesses in the past many months, especially the real estate sector that they will be forced to shut shops if emergency measures did not come their way. Reports have it that MSMEs have shut shops across the country since demonetisation. Small businesses are cash-dominated and that demonetisation throttled them.

Impact of cash ban

What is new in the MSME story is that the government never accepted their problem was an offshoot of cash ban and flip-flop under the GST regime and hence did not deem fit to act for many months. In fact, the narrative after the completion of one year of GST was that it has helped formalise the economy by bringing more informal sectors into the tax net. If that was one of the aims, then giving the latest exemption to MSMEs goes against the rule as it has again sought to take away a large number of them out of the tax net. Earlier, those who had a turnover of Rs 20 lakh per annum were out of GST net. Now, businesses up to Rs 40 lakh are out of tax net.

An HSBC report had refuted the claim of formalisation of the economy saying that the level of formalisation had gone back to the pre-note-ban levels.

But coming back to MSME problem, it was only in the past five to six months that the Reserve Bank of India was started being nudged by the finance ministry to ease credit and liquidity to the sector. It showed some reluctance in the beginning because it was in the midst of reforms that could have larger ramification on credit culture in the economy. But the government wanted to act in a haste and it ultimately eased certain rules, albeit after a regime change at the RBI. Critics said it was largely to help the government in the upcoming elections.

Be that as it may, analysts have started pointing to the GST increasingly coming under the risk of losing its basic structure. It was envisaged as a seamless levy to help strengthen the Centre and state finances. India had a complex indirect tax regime since independence and the GST was expected to remove its cascading effects and bring a plethora of taxes and cesses into one. As a simple tax regime, GST was also expected to bring more people under its net by expanding the tax base.

None of the goals appear to have been achieved so far. On the contrary, the initial reports suggest that the states which were meant to gain after implementation of GST, have been losing revenues. Revenue considerations have been relegated to a back seat. The finance minister after each GST Council meeting claims that decisions are taken on the basis of consensus, but the opposition-ruled states are rarely on-board on rate cuts. In the December GST Council meeting, Punjab, West Bengal, Kerala and Assam, and even Karnataka were opposed to the rate cut idea as they said they were losing revenues which they could hardly afford. GST revenues have been slowing gradually and the government is far from netting the desired Rs 1 lakh crore per month.

According to Deloitte India, the rate cut measures are expected to encourage higher demand and consumption. Clearly, the government moving into elections, wants consumption to grow manifold. Official data shows rural and urban demand has been tepid for quite some time. The government does not have any other window to give largesse. In the Budget, it can’t make promises related to cash. This is not a full Budget. But the question is should governments tinker with GST like this and in the process corrode the very soul of the indirect tax reform?