Implementation of GST from July 1 is touted to be the most significant tax reform since independence. We all get carried away by platitudes without realising its real effect or impact. In recent weeks I have met a dozen people who form the senior management in the BFSI industry and the GST has come into conversation with some very interesting views. All of them were lauding the move, which got me a bit worried. My worry was not about why they were lauding the move, it was about the fact that none of them was willing to get into the details of how the move will impact their business.
Now that the GST rates are out, there is plenty of amusement around what will get expensive and what will get cheap. It is as if people will take more baths or use more hair oil, because the tax rates will make them cheaper. Tax arbitrage has existed in India since time immemorial and several unorganised businesses and traders have thrived on this differential. I had a friend who bought his car in Haryana, while he was from Punjab, just because it was cheaper and he could save on the money. The rise of indirect taxes in India has been well documented and is something that many among the common people have not really factored in.
The indirect taxes on several products actually constitute up to 25-30 per cent of the cost—the GST aims to streamline this and end the arbitrariness, and bring equality in prices across the country. However, one has not factored in the impact, because like several other things the real impact will be felt over time. While, everyone has been singing paeans of the demonetisation—the man on the street who faced the problems is still grappling with how it has made some of his financial transactions difficult. Several small eateries have shut, and many people in the unorganised sectors have lost jobs.
Get set for a tight situation
The unorganised sector of the economy has existed for decades and in several segments it supports the main economy. Several economists have time and again highlighted the advantages of such co-existence. Let me try illustrating this with an example – the advent of several car models has killed the car repair industry. Today, even for the smallest of dents or damage, one has to go to the company-owned garage or some place big. So, what could have been mended by a small repair shop is no more reaching this labour market, car parts now are replaced and rarely repaired. The few mechanics that function independently will soon be out of jobs, because the GST would mean they would have to come into a system, which treats them at par with the big garage owners.
The price differential on which they could offer their services will no more be competitive. You could extend this example to several players in the FMCG and small time traders. Imagine paying a huge sum for an AC installation, which today is packaged as part of the AC purchase once the full implementation of GST will come into play. The combined impact of demonetisation, cashless and GST will take a few years to settle in before one realises what was gained and what was lost.
I have heard several learned men explain the virtues of bringing everything under the organised sector and how it will propel the economy and growth. They have gone to arrive at theories on how inflation will go down with all these changes. I do not doubt their wisdom, but what scares me is how none of them sees some obvious blind spots. For instance, the cost of compliance for almost every business has gone up and will further go up. It will also make several businesses unviable to get into because of these costs.
The preparedness of states and all those who will be impacted by GST is shaky to say the least. I fear a situation which is common every monsoon season—the state government will blame the municipality for not being prepared and causing water logging. The municipality on the other hand passing the buck to a contractor and claiming their heroic efforts in keeping the city moving despite the rains. If all of them do their jobs – travelling during the monsoon will not be a pain and the civic bodies will also save several people from hospital visits on count of dengue and malaria.
I hope the GST implementation does not result in a situation like the municipality in monsoons or the suffering that the common man has to endure in the rains. Let us all brace ourselves for some interesting times in the coming months.