Better and simpler GST

Govt must now deal with the problem of too many rates

Responding to the growing discontent among small businesses and exporters about the goods and services tax (GST), the GST Council came up with wide-ranging changes on Friday. The guiding principle of the decisions was to improve the liquidity conditions of exporters, who were struggling with money being blocked in the GST process. The reduction of compliance cost for small businesses was a sound move as it was anyway disproportionate to the revenue generated. The Prime Minister has termed the measures as an early Diwali gift to the taxpayers and has said that his government does not want to put the traders in “the trap of red-tape, files, bureaucracy”. This is a welcome development as India needs a simplified and easy-to-comply-with tax regime that does not impose huge deadweight compliance costs, which, in turn, cripple the productive capacity of small enterprises. One common simplification measure across nations is less frequent filing of returns, which the GST Council has recognised, finally. That explains its decision that businesses with an annual turnover of up to Rs 1.5 crore will henceforth have to file only quarterly returns, instead of the monthly hassle.

For exporters, the past few years have been very tough. Keeping aside most of the infrastructure-related bottlenecks that they have to contend with, export growth has plummeted in recent years in tune with slackening global demand. This year, when global trade flows started looking up, exporters have been pegged back by an appreciating rupee as well. The introduction of the GST, even though desirable, made matters worse. Exporters estimated their costs rose by up to 1.25 per cent — significant enough to wipe out their competitiveness and profitability in low-margin exports such as textiles, garments, and leather goods. The key issue troubling exporters was delays in claiming tax refunds. Under the GST, they first had to pay the integrated GST and seek a refund only after the goods are exported. Smaller exporters were required to furnish bonds and a letter of undertaking to the local commissioner. This, in turn, was creating a massive working capital crunch. According to one estimate, the GST’s introduction was likely to hold back exports worth Rs 65,000 crore. To be sure, their order books had fallen by 15 per cent in the period ending October. Thus, the latest decisions by the GST Council address most of the concerns of small businesses and exporters, though the details of the e-wallet scheme are still awaited. The string of measures also suggests that the GST regime is likely to be a work in progress for a while before it settles down into a well-oiled tax system. That’s much better than having a hurriedly pushed through imperfect tax system that does not address the emerging concerns of the taxpayers.

However, one big problem, of too many rates, remains to be dealt with. While many traders are happy with the reduction in rates for 27 items, the very purpose of the GST was to prevent the need for itemised changes in rates; and to have fixed rates that were logical and predictable. At the moment, there are different rates for the same category of products, which defy rationale. The council should get down to reducing the number of rates and rationalising them so that all products in one broad category attract the same rate.