NOWHERE TO HIDE: 29 lakh new businesses caught in GST net

The Goods and Services Tax is turning out to be quite effective in ensnaring more and more people into the tax net compared to the previous excise and VAT system.

Out of the 93.33 lakh individuals and businesses registered under the new tax system as of the end of last month, a whopping 31% are first-timers.

In all, 28.95 lakh new taxpayers have been caught in the GST net as of November end, while 64.39 lakh taxpayers in the system are migrants from the old system.

GST achieves greater level of compliance by using IT and by allowing businesses to pass-through taxes paid by their suppliers.

The exact impact of the ongoing change is difficult to predict.

On an immediate basis, such an expansion of the indirect tax base could lead to improved revenue for the government.

However, it also adds to the cost of doing business in India, and could have a negative impact on the private sector economy.

A shifting of money from the private sector to the government sector could also mean less efficient utilization of resources, as the private sector is considered to be more efficient than the government in spending money.

For example, a private company could construct a building in 75% of the amount that a government department or agency would take to construct the same building.

Former prime minister Rajiv Gandhi estimated that the efficiency level of government spending is only 15% in many welfare schemes.

In other words, out of every 100 rupees spent on a project, only 15 rupees is actually spent on the project and the remaining 85% is siphoned away by corrupt officials and contractors. In comparison, the siphoning away of funds in the private sector is estimated to be in the single digits.

In other words, the more money the government gets to spend, the more the corrupt officials get to siphon off, even though the use of Aadhaar and direct benefit transfers have improved the situation.

On the other hand, the crackdown on tax evasion could also lead to an improvement in efficiency by diverting money away from non-productive and luxury segments — such as speculation on real estate and gold — into more productive areas such as infrastructure.

In the old system, many businessmen were ‘forced’ to invest their untaxed income in opaque sectors such as real estate and gold, which offered protection from government scrutiny.

Secondly, the expansion of the tax base would also make ‘honest’ and compliant businesses more competitive against their less-honest competitors. This could drive business to entities such as large supermarket and e-commerce chains, and away from smaller, cash-based local shops and businesses.

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The government has been facing some pushback from small traders and businessmen due to the expansion of the tax net to include more and more of them.

The ruling BJP barely managed to scrape through in state elections this month in Gujarat — arguably the state with the strongest support base for the party.

It more or less abolished the 28% tax slab after facing tough questions from smaller traders in Gujarat, moving most items to the 18% rate.