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Several state finance ministers have complained that GST could destroy the MSME sector in the second hit after demonetisation


The Union government of the NDA has termed the launch of the Goods and Services tax (GST) at midnight today (June 30) as a historic occasion, probably India’s biggest ever economic reform after the decision by the Narasimha Rao government to open up the Indian economy in 1991. The finance minister at the time was Manmohan Singh.

The current finance minister Arun Jaitley has pushed the GST through both houses of Parliament and through objections raised by several state ministries and trade bodies, including trade unions, and is now poised to pen his name into the history books as GST becomes a reality. GST, of course, was mooted by the earlier UPA ministry, at which point the BJP (in Opposition then) hade vociferously protested.

The ruling party has organised a sort of ceremonial launch at the Central Hall of Parliament. All parties were welcome, though many chose to stay away.

GST brings a huge number of items under its umbrella, trying to regularise and rationalise the multiplicity of taxation that had been prevalent in the country since Independence and before.

GST touches almost all aspects of indirect taxation in the country, and subsumes over a dozen central and state taxes. The promotional for GST was “one nation, one tax, one market”.

Four taxation rates—5, 12, 18 and 28 per cent—are supposed to apply, though it raises taxation on many items (even introducing taxation on some utilities and goods that were tax exempt so far) and reduces in some.

The basic idea is to make the taxation process simpler for the common man, so that compliance grows.

The following are some special pointers:

  •  There will be one point payment, where the preceding taxation points are collated and  presented as one. Preceding taxation will arrive as credits. Hence the consumer has to  bear the last point GST.
  •  The government is serious about companies and organisations in the different stages of the GST passing on the benefits to the ultimate consumer. This will be ensured by an anti-profiteering unit, especially set up for the purpose. During its two-year tenure, this unit will set up the special systems that will ensure passing on of benefits.
  •  Two important goods are out of GST at the moment. They are petroleum—the price volatility of which is not in the hands of the government and needs pointed policies in place—and alcohol. These will be decided later by the GST Council.
  • Some prices will go up. That will not affect inflation, say economists, but will certainly affect two sections: the poor and the MSME sector, which was first hit heavily by the demonetisation experiment which failed miserably to address any of the issues it intended to.
  • While rate changes will be in effect from Day One of the imposition of GST, the fear is that systems around the country are not equipped or have not been updated to address this humongous change. It was advisable, say economists, to introduce this in gradual phases, which would have enabled organisations to upgrade its software and hardware to allow for computation. This is likely to be a computation nightmare.
  • The service tax regime will be affected immediately, with some services getting costlier.
  •  Financial services and telecom have been put in the 18 per cent rate slab under GST. It was 15 per cent earlier. How this will affect cost of finance and other issues related to it, is to be seen. Worries in this segment are from the micro and mid-level industries to the top-of-the-rung corporates.
  • Education and healthcare remain exempt. They will probably be examined later.
  •  There is already a huge chaos regarding what impact GST will have on white goods. White goods dealers have been busy selling off existing stock at huge discounts over the past month. However, it is expected that the prices are unlikely to change abruptly, till the companies can get a measure of what it means for their businesses.
  •  A big worry for manufacturers would be maintaining inventory. Would lean stock be more efficient, or would hoarding a bit help? Similar will be the case for wholesalers.
  • The recent rally at the domestic stock markets have slowed down as GST approached, and might be major corrections ahead, a thing that has been avoided  by overenthusiastic bulls.
  •  Small traders with annual turnover less than Rs 20 lakh are exempt from GST registration. That barely skims the surface of the problem, though, because even a well-located pan shop will have annual revenues exceeding that.
  • While small businesses are exempt under the composition scheme—benefitting from not having to meet with detailed compliances under GST—but they will not get the benefit of input tax credit. For composition scheme (turnover below Rs 75 lakh), traders will have to pay 1 per cent tax on turnover. Manufacturers will have to pay 2 per cent while restaurant businesses will have to pay 5 per cent.

India Legal Bureau

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