GST, Other Taxes are Politically Fixed before and after Elections: Prof Arun Kumar

PROF. ARUN KUMAR, Malcolm Adiseshiah Chair Professor at Institute of Social Sciences and former Professor at Centre for Economic Studies and Planning, JNU, is an authority on black economy. He has authored The Black Economy in India, Indian Economy since Independence, Demonetization and Black Economy, Ground Scorching Tax, and Indian Economy’s Greatest Crisis: Impact of…

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PROF. ARUN KUMAR, Malcolm Adiseshiah Chair Professor at Institute of Social Sciences and former Professor at Centre for Economic Studies and Planning, JNU, is an authority on black economy. He has authored The Black Economy in IndiaIndian Economy since IndependenceDemonetization and Black EconomyGround Scorching Tax, and Indian Economy’s Greatest Crisis: Impact of Coronavirus and the Road Ahead. His areas of specialisation include Public Finance, Macroeconomics and Development Economics. He studied Physics at Delhi University and Princeton University, USA. He did his Ph.D. in Economics from JNU, and taught there for three decades till 2015. In an interview with MOHAMMAD NAUSHAD KHAN, he said, in the last two years the price of petrol and diesel was not increased when elections were close but soon after elections prices were increased. Excise duty, income tax, corporation tax, etc., have been subject to pulls and pressures.

In general there has been politicisation of GST. Your view?

It is the case with all taxes and not only with GST. Before elections freebies are announced generally and some changes may be made in direct and indirect tax to please the voters. For instance, before the Gujarat elections last time some GST rates were tweaked. Manipulation of taxes before and after elections has become a routine affair. In the last GST Council meeting also GST rates were sought to be changed since important assembly elections in some states are due in February 2022. Duty on petrol and diesel was decreased recently. In the last two years we have seen that the price of petrol and diesel was not increased when elections were close but soon after elections prices were increased. Excise duty, income tax, corporation tax, etc., have been subject to pulls and pressures.

How would you like to respond to the argument that GST has become a political tool?

Definitely it has become a political card or more precisely a political tool. GST at its inception was presented as an economic tool only but that has not turned out to be the case. GST has impacted adversely the unorganised sectors and I have been saying for long that it is not desirable for India because it would damage the unorganised sectors which are the dominant component of the economy in terms of employment. Because the unorganised sector is exempt from GST, it does not get input credit nor can it give input credit to its purchaser. So, it has to bear a higher cost and charges a higher price. Purchasers from the organised sector have to pay a reverse charge so that their working capital cost increases. This has led to demand shifting from the unorganised to the organised sectors and caused a decline in the fortunes of the former. So, in many ways the unorganised sector is unable to deal with GST. It is also very complex with multiple tax rates and many rules which make it difficult for small businesses to deal with it.

How has GST impacted organised and unorganised sectors over the years?

Due to the shift in demand from unorganised to the organised sectors, it has been declining. For example, a business I know which used to get photocopying done from a small shop in the basement of the building has shifted to a bigger shop which has a GST registration and can give input credit. The small shop does not have a GST registration. Another instance is from the pressure cooker industry. The chairman of this industry, Mr. Jagnathan in his 2018 annual report had said that we are five units in organised sector and 25 units in unorganised sector. We in the organised sector are very happy because we are growing at 24% and added that this is since demand has shifted to organised sector from unorganised sector which is unable to deal with GST.

Because of demonetisation and GST the unorganised sector has been hit badly. The unorganised sector has become invisibilised since policymakers are not bothered about it and data does not take it into account. The unorganised sector has been again ignored during the pandemic. All this is impacting our economy adversely since the unorganised sector employs 94 per cent of the workforce. It has led to higher unemployment. For example, during the pandemic, people shifted towards purchases more from e-commerce platforms than from the neighbourhood stores. E-commerce has increased by 30 to 40 per cent. If such is the increase in e-commerce when the economy is stagnating then the other sector has to be declining. MSME stands for micro, small and medium businesses. Micro businesses are 99 per cent of the units whereas small and medium are only 1 per cent. In micro units the employment is 97.5 per cent of the MSMEs. I have been repeatedly saying that micro should be separated from small and medium so that policies can be made specifically for them. In micro units the average employment is 1.7, which is much less than in the small and medium units. Similarly, the capital deployed in micro units is negligible compared to the other two. Policy for MSME is effectively for small and medium units and not for micro so they get marginalised. This has happened during demonetisation, GST and now during the pandemic. In Atmanirbhar Bharat Scheme this is visible which clubs micro, small and medium units in one category so that the benefit that the micro could get accrues to small and medium ones.

Do you think the objective set by the government after the introduction of GST has been achieved?

The government had so many objectives; to control inflation, black economy, increase the rate of growth by 1 or 2 per cent, etc. Not only none of them has been achieved, the opposite has happened. The quarterly rate of growth fell in the 8 quarters preceding the pandemic. This is so when we don’t even include the unorganised sector in the data. The figures would be even lower if the unorganised sector had been included. Inflation has increased sharply in the last one year. Black economy has not come under control. There are many reports of emergence of companies to claim false input credit or fake E-way bills are generated. The biggest example of the latter is from the raids on the perfume makers of Kanpur. What trucks are carrying cannot be confirmed without inspection and that is leading to corruption. So, black income generation is going on. In brief, GST instead of benefitting our economy has had an adverse impact. I have written about it in detail in my book on GST, Ground Scorching Tax, Penguin Random House. So, it can be said unambiguously that the objectives have not been realised.

Any reforms you would like to suggest in GST? Or, is it a structurally flawed idea?

I have been arguing that GST is structurally flawed since it hurts the huge unorganised sectors and leads to a decline in demand which causes fall in employment and decline in the rate of growth of the economy. To reform it, I have argued in my book that it should be made last point tax. After all, finally the tax is collected from the consumer even though it is collected at various stages of production, transportation and distribution. For example, consider the purchase of a utensil. First, tax is paid on iron ore, then on its transport, on service of accountant and then on its sale. Next there is tax on pig iron and its various inputs and an adjustment of input credit. After that all these taxes apply on steel. Finally, they apply on the utensil and the consumer pays the cumulative tax at each stage. This makes the system unnecessarily complex.

My argument has been that one tax levied on the declared MRP can collect the entire tax and intermediaries need not be taxed to reduce the complexities and the problem of input credit will be eliminated. This will eliminate the problems currently faced by the unorganised sector. It will also facilitate ease of doing business since the complexity created by GST would get eliminated. Also, there should be only three rates and not the many as at present – zero on essentials, middle rate for most goods and services and a surcharge on sin goods. Finally, more should be collected from direct taxes so that the tax rate on normal goods can be lowered which will help reduce the rate of inflation and boost growth.