 Hello and welcome to NewsClick. I am Poranjoy Gohar Thakurtha. We're going to discuss the goods and services tax or GST. On the 1st of July 2019, the new GST regime enters its third year. Two years ago, at the Central Hall of Parliament, there was a midnight meeting and the government said that India has now entered a new tax era. A new tax era which would unite these countries markets, fragmented markets. A tax which would be good for everybody concerned, for the taxpayer as well as for the public at large. To what extent has the government succeeded in improving the indirect taxes regime? This is the question that I'm going to ask. Professor Arun Kumar who is here with me in the studio, well-known economist, a former professor of economics at the Institute of Social Sciences, Jawaharlal Nehru University. Professor Arun Kumar, former finance minister Arun Jaitley has issued a statement saying that the monumental restructuring of one of the world's clumsiest indirect tax systems was not an easy task. And he felt that he feels that this government has been able to develop a consensus among different states and we can talk about the federalism part of it. But he says that the GST has merged 17 different laws and created one single taxation regime. And earlier the GST rate of taxation was a standard rate for value added tax which was 14.5%, excise was 12.5%, you added the central sales tax and then you had the cascading effect of tax on tax. And effectively the consumer was paying about 31%. And now we have entered a new regime and of course there were exceptions to that. But today to use Mr. Jaitley's words, there is only one tax, online returns, no entry tax, no truck use, no interstate barriers. You've recently written this book where GST has been somewhat derogatorily described as ground scorching tax. So is the Mr. Jaitley and the government, the Narendra Modi government justified in being exultant about having entered the third year of the new GST regime? Well, in my judgment it has damaged the economy. You know it was said that this will lead to a higher rate of growth by at least 1-2%, lead to lower prices, lead to a higher collection of taxes. None of these things have come out right. The rate of growth, if anything, has fallen since GST has been implemented, the latest quarterly estimate is 5.8% and declining from 8.2% has come down. Inflation hasn't come down in spite of the fact that agricultural prices have been declining because there's a deflation in agricultural prices, rate of inflation hasn't come down. And tax correction under GST has been shot by 1 lakh crores roughly last year as compared to the targeted amount. So none of these three big things that were supposed to have been done has happened. Secondly, let me just interrupt you here, I'm going to come to you again. According to Mr. Jaitley, the SSE base in the last two years has increased by 84%. The number of SSEs covered by GST was around 65 lakhs. Today it's 1.2 crores. Obviously, according to him, this has led to higher revenue collections. In the eight months of 2017-18, that's July to March, the average revenue collected each month was about 89,700 crores. And in the following financial year, 18-19, the monthly average has increased by about 10% to 97,100 crores. And the states are happy because they are guaranteed a 14% increase. So according to Mr. Jaitley, it's been good for the economy. So, you know, what was expected of it, you know, was 1 lakh 10,000 crores and we were collected in the last year roughly an average of 97,000 crores. That's why revenue is short, you know. So in other words, that has not really happened that, you know, it has led to an increase in the revenues. You know, it's not commensurate with it. Second is that even though 1.2 crore people have registered under it, but those are filing returns are only about 70 to 72 lakhs, okay. So the large number of people who are not filing returns. And as Mr. Jaitley himself said, 5% of the entities pay 95% of the tax and 95% of the entities pay only 5% of the tax. So you can register a lot of people, but they're not necessarily the people who are going to pay a big amount of tax. So therefore, in a sense, there's a fudge in all this, you know, in the way the data is being presented for the success. But more than that, you know, it's two problems. One is implementation. The other is a structural problem. In the last two years, there have been more than 800 changes. You know, even under demonetization in 15 days, there have been 100 changes. Let me give you the figures I have. In the last two years, there have been 90 notifications on rate changes and exemptions. 175 non-tariff notifications on the central goods and services tax. There have been 20 notifications for the integrated GST. And there have been 28 orders issued and 370 circulars have been issued by the central board of indirect taxes and customs earlier called the central board of excise and customs. These are circulars and press notes and information seats and flyers and about 50 odd bulletins which are in the form of FAQs or frequently asked questions. And of course, there are hundreds of case laws and advanced rulings. Yes, and as you rightly said, high court judgments have come, etc., which have changed the character of this thing. So in other words, there's a huge amount of confusion and when you talk to chartered accountants and income tax lawyers and big businessmen, even they are confused as to what is the state of the current GST. But the unorganized sector, the one that is unambiguously hit badly because even though it's exempt, it's actually suffering as a result of GST. And I'd like to quote only the chairman of the pressure cooker industries, Mr. Zaganathan. He said in October that we are very happy because our business has increased and why has it increased? Because the unorganized sector is unable to cope with GST and therefore the business has shifted to us. This kind of story is repeated in the shoe industry. It's repeated in the other small scale industries, etc. So unorganized sector has been declining. Organized sector is happy that its business has increased even though it's confused about the laws. So the rate of growth of the economy has fallen because unorganized sector is 45% of GDP and if that declines... About 90% of the total jobs. 94% of the jobs and 45% of the output and if that begins to decline then the rate of growth is falling. And the reason why the GDP data doesn't reflect the unorganized sectors is because you collect the data for the unorganized sector once in five years in between you assume that it's roughly growing at the same rate. There's slight complication there but roughly that it's growing at the same rate as the organized sector. But that was true before demonetization but that's not true now because demonetization administered a shock and GST has administered a shock to the economy. And these two shocks have meant that the ratios have changed. So therefore the rate of growth has come down rather than it's going up. Prof. Arun Kumar, Mr. Jaitley and I quote him says after two years one can confidently argue and he says without fear of contradiction the GST proved to be both consumer friendly and SSE friendly. The high taxation of the pre-GST era pinched the consumers pocket acted as a disincentive against tax compliance and the last few years have seen each of the meetings of the GST council reducing the tax burden on consumers and the tax collections have improved and it's a far more efficient tax system, better compliance. The 31% tax which was temporarily 28% has been the largest single reform. And he believes that the loss of revenue on account of the fact that you have the items of daily use which are in the 0 to 5% slack the government has actually lost 90,000 crore but only the luxury and the sinful taxes remain high and he's hopeful that things will move in a direction that will be more rational. And he's saying we are not taxing the Hawaii Chappell as a Mercedes car and the 28% slab is almost being phased out and the 0 and 5% slab will always remain and as revenue increases further it will give an opportunity to policy makers to possibly merge the 12 and 18% slab in one rate and thus effectively making the GST into a two rate tax all of which are supposed to be very good for the economy. And one last point, Mr. Jaitley says there were protests in Surat but the issues were resolved amicably and the BJP won all the assembly seats in the Gujarat assembly polls in Surat and in 2019 the BJP won the Surat Lok Sabha seat by the highest margin in the country. I mean economically good and politically good also Mr. Jaitley argues. So you know there are a whole range of issues that are being raised here when would the consumer benefit when the prices begin to fall and prices haven't begun to fall. In fact prices have continued to rise. You know the rate of inflation is still in the positive it's not in the negative. So it's not as if because of the introduction of GST people have benefited because the prices have begun to fall. So that's point number one. But two is that it's a hugely complicated tax and even the organized sectors unable to cope with it. So this ease of doing business that was supposed to take place because of which investment was supposed to rise. Investment rate had peaked in 2012-13 at about 37% it's down to about 30%. So in spite of two years of GST the investment rate has not risen. So therefore the ease of doing business is not visible people are not able to invest more and the reason why people are not investing more is because the rate of growth of the economy has come down. When the rate of growth of the economy has come down it is because the unorganized sectors affected adversely and because that's 94% of the workforce so their incomes have come down and where their incomes come down then the demand goes down. Not only demand for food goes down but demand for other things also goes down and when the demand goes down then capacity utilization becomes less. So RBI data shows that capacity utilization is under 80%. And if capacity utilization is low then investment is less because if I can produce cars but I'm not able to sell them then why would I invest more? Maybe we already have a situation where cars worth 34,000 crores are lying idols. That's right. So why would you invest more in that situation? I mean five of the biggest car companies have actually shut down their assembly lines for short periods and some for a few days, some for a few weeks. Yes. Even two wheels sales are down. This is true in FMCG, this is true in other sectors also. Heavy vehicles sales are down. So not only automobile sector but FMCG and other things also. So demand has become short and that's why the rate of growth has come down and that's why capacity utilization is low. So investment is not picking up. So at the macro level this is not true that it has led to better performance for the economy, better performance for the people who are the consumers. So the question is what is it that GST has? That GST has two things. One is it's calculated as VAT, value added tax. The other thing is computerization. Without computerization it won't work. Now the benefit of computerization should not be confused with the benefit of VAT. So what we are seeing in terms of ease, you know, is because of computerization. That has nothing to do with VAT. Calculation of VAT remains very complicated and the small scale and the cottage sector is not able to deal with it. Most people believe that the computerized system of the goods and services tax network, the glitches that were there, the technology platform has stabilized. But the point is that's a separate thing than VAT. Okay, so we must not confuse the two. If the earlier system had also been computerized all that benefit would have been there also. But the eva bill that has been introduced which Mr. Jaitley is talking about, ease of transportation, etc. there's a huge complication there because you could be carrying the mis-specified goods and therefore there's a lot of checking and a lot of corruption going on in the eva bill. Similarly a lot of companies have come up which are presenting fake input credit, you know. So when they present fake input credit then the government loses revenue, you know. So large amount of tax evasion cases are coming up. Now the question is, as he says rightly that we have kept all the items of daily consumption, education, health, outside, you know, or at low rate of tax. Who's the last consumption? But the point is that when you have an indirect tax it's levied at some point and it's felt at another point. So like weed doesn't have any GST or any VAT, okay. But when you levy the tax on trucks the price of transportation goes up and therefore the price of weed goes up. So therefore, you know, it's levied at some point it's felt at another point. So having zero rate doesn't mean that doesn't have a tax, okay. Secondly, unorganized sector up to 40 lakh it doesn't have to register. Between 40 lakh and 1.5 crore it is in the what's called the composition scheme with a very simplified structure. But there is the problem. The problem is, so they don't get input credit therefore their cost of production is higher, okay. As compared to the large-scale sector which gets input credit. Then when they sell they cannot give you input credit so their price would be higher even though the tax is not there on them compared to the organized sector. Third is if you're in the composition scheme or this thing, then there's a reverse charge mechanism which is applied. So the tax that you should have paid the other fellow who's buying from you will have to pay. So the cost goes up further. So therefore the demand has shifted to the organized sector away from the unorganized sector even though the unorganized sector is not in GST, okay. Even though it's simplified for them, okay. That's why the unorganized sector is hurting very badly. So you're saying this is actually a structural problem. This is not just an implementation problem. And it's widened inequalities. And it's widening inequality, okay. It's also, this was supposed to benefit the poorer states because it's supposed to be destination tax but the poorer states have the larger amount of the unorganized sector. And when the unorganized sectors hit badly then the poorer states are hit badly. So therefore it's going to increase inequality between the poorer states and the richer states even though it is supposed to be destination tax. No, no, destination tax. After the second year, 20 states are independently showing more than... No, so that's a different point that they may be... Revenue. They may be getting revenue. And the compensation fund is not necessary. Revenue in nine states. Yeah, so that's a different point. But the point is that the unorganized sector is concentrated in the poorer states. And if the unorganized sector declines, the poorer states' income will decline. And therefore the income disparities will rise, okay. So I have two sets of questions for you. The last two sets. As I was telling you, I was reading an article by Mr. Rajagopalan, TNC Rajagopalan Business Standard, and he suggests the way forward. And he says the new return formats should be implemented right away. The trial period has to begin. But these concerns are large companies. There's a need to change the laws and the rules pertaining to the new computation schemes for service providers. How do you level penalties on profit? Profit tiering. The whole issue of profit tiering. Profit tiering. That's right. Raising the threshold of suppliers of goods to 40 lakhs. Making digital payments mandatory. Extending the due date, the power. These are all implementation issues. You know, I'm saying it's a structural problem. It's not an implementation problem. And the reason is... And the way the refund is called. Yeah, the reason it's a structural problem is because it's a VAT. Therefore, you produce something, pay tax. Then you sell it and then you get input credit. You produce something. So suppose you buy, you know, utensil. There are 100 stages where it stacks. Somebody pays five pesos. Somebody pays 10 pesos. And then there's an input credit, you know. But ultimately it's the consumer at the end who's paying the entire tax. And that's why the complication is coming. And that's why your 4 billion filing of returns every month, you know, entries in the returns that are coming in. And therefore, the computer systems get jammed. So by the 10th, you have to file the GSTR-1. By the 15th, you have to file the GSTR-2, which is at the moment suspended. Then by the 20th, you file the file GSTR-3. And in each state that you're in operation. So something like Maruti will have to file 1100 returns in the year. Okay? So it's a hugely complicated. Second point is that ultimately it's the final buyer who's paying it. So why have all these intermediate stages? I have suggested a simplified system where it's only the last point tax that is taxed. All the intermediate stages are removed. So eva bill requirement is removed. Input credit is removed. The reverse charge mechanism is removed. All the things that are affecting the unorganized sector, they're all removed as a result. It's a final good tax. Mr. Jaitley says that it's already simplified. That the SSC had to file multiple returns, entertain multiple inspectors, additional inefficiency. That's a different argument. That's a different argument. Trucks being stranded as state boundaries for days altogether. Trucks are still stopped because they may be carrying fake invoices, searches still going on and there's a lot of corruption going on in that. But the point that I'm making is there is a structural problem. These are all implementation issues that he's referring to. All right. Or the other article that you're referring to, business standards, all implementation. To try and do that. But if it's a structural problem, you have to change the structure. And to change the structure so the unorganized sector is not at a discount, which it is at the present. I'm saying just leave it as a final point. Okay. Because ultimately it's the final point. And as Mr. Jaitley has said, 5% pay the 95% of the tax and 95% pay 5% of the tax. Okay. Therefore, if only the last, you know, the final good price, the MRP, if the tax is levied on that and all the unorganized sector therefore would be left out of it, it'll be just the 5% who will be paying all the tax anyway. All right. Mr. Jaitley and the present government thinks that the GST council is an example of fiscal federalism. Mr. Jaitley describes the GST council as India's first statutory federal institution. Central representatives of the central government and the state government sit together. They decide. Both have pulled their fiscal rights in a collective forum to create one common market. And his view is that while he was chairing the GST council, the finance minister of states notwithstanding their political position, that their party stake had displayed a high level of statesmanship, acted with maturity, worked on the principle of consensus, and this has added to the credibility of the decision-making process. He said they were fearing there would be loss of income, but as I mentioned a little while ago, after the second year, 20 out of the 29 states have showing that they have 14% increase in their revenues. Compensation is not required. So on the whole, according to Mr. Jaitley and those who are supporting this government believe that this is an excellent move and this is, you know, really made our country not just united our market and unified the market. It's made us more fiscally federal. So, you know, having taxation doesn't mean your market is split up. We have one market where goods could move. There may have been delays, you know, but that delay doesn't mean that we were not one market. You know, it's a hyperbola and the government has been indulging in hyperbola. There's one market that one nation, one tax, et cetera. There's not one tax, there are eight taxes, you know, and therefore cascading effect continues. But it's still better than having 17. No, but the point is there were no 17 taxes anyone. If you're a manufacturer, you're not paying entertainment tax, et cetera. You're paying basically service tax, sales tax, and excise duty. And now you're paying CGST, SGST, and IGST, and SES. So, three taxes are replaced by three taxes, you know. You may have all the three taxes in one bill as opposed to earlier, you know, in different laws, but you still have three taxes, you know. So, it's not as if 17 taxes have been replaced by one. Basically, you're replacing three main taxes by three main taxes for bulk of the producers, you know. So, this is all hyperbola. This is not really the thing. Second point is fiscal federalism is very important in India because we are a diverse country. The requirements of Assam are not the same as Maharashtra. The requirements of Himachaland are not the same as Tamil Nadu. So, saying that we give up our taxation powers is a very bad thing. You know, it works against fiscal federalism. You know, Assam may want to tax differently. You know, it may want to tax timber. Maharashtra may not want to tax timber. It may want to tax cards. Maharashtra may not have problems with education. So, are you arguing that the GST regime reduces their flexibility? Yes, they reduce their flexibility and therefore it works against the basic structure of the constitution where autonomy was to be given to the states. You know, so states giving it up doesn't mean necessarily it's good for the country. I'm surprised that the opposition parties and BJP was in the opposition earlier. It opposed it for some of the... Including Mr. Nelligarh Modi. Yeah. And now the Congress was opposing it but could not oppose it effectively because it started saying that it was its own baby. So, politically there's confusion. But let me say nobody has represented the interests of the unorganized sector. If any party had represented the interests of the unorganized sector, then this kind of tax would not have gone through in the economy. So, my argument is that let's simplify it. Let's use the computerization and the advantage of computerization with the last point tax. Earlier, why the last point tax did not work the way it should have worked was because there was no computerization. Now that we have the GST network, we have the GST numbers being given, therefore the last point tax will work better. And the kind of tax evasion that was going on earlier, similar tax evasion is going on even today. You can buy without bills. You can buy a variety of things. But with computerization, you can check it if it's simplified. Okay. Thank you so much, Professor Arun Kumar for giving us your time. To summarize a very, very complex and a complicated issue, what Professor Arun Kumar is arguing is despite all the claims that are being made by the government, he believed that there's more hype than substance in the government's claims that the introduction of the goods and services tax, the new goods and services tax two years ago, has made a dramatic change to the working of India's economy. On the contrary, Professor Arun Kumar argues that the structural problems that continue to plague India's economy and the unorganized sector in particular remain and perhaps have been exacerbated. Thank you for being with us on this program. Keep watching NewsClick.