The Goods and Services Tax (GST), which has completed a year, was supposed to hit the unorganised sector. However, even after a year of GST implementation, there is no research or study on the impact of the new tax on the unorganised sector. Most of the reports on unorganised sector distress have been mostly based on anecdotes and not on any data.
When asked on the reported distress in the unorganised sector due to GST, the revenue secretary Hasmukh Adhia told Business Today: "There are anecdotal stories that we get to hear, but they are not borne out of any research data."
Pronab Sen, former chief statistician of Indian and an economist, explains why it is difficult to measure the impact of GST on the unorganised sector.
"I don't think it's easy to figure out that the damage to the unorganised sector. We really don't have a measure as to how much the unorganised sector sells to the organised sector, and how much of that can be replaced by the organised sector. In my opinion that's virtually impossible to figure out," says Sen.
He though says that there will certainly be some real effect (of GST on unorganised sector). "I don't think that the govt can really whisk that away. The real question is how bad it is and if the unorganised sector would be able to adjust to it."
To be able to cope with the impact of GST, he says, the unorganised sector would have to be able to provide the goods or services at a price which is below the tax deducted price that the organised sector discharge.
"Today for instance the organised sector is paying 15 per cent tax, then the unorganised sector that doesn't pay tax, automatically gets 15 per cent price advantage. Now, if they register for GST, that advantage goes off. Even if they get input tax credit, the compliance cost would go up," he says.
Anil Bharadwaj, secretary general, Federation of Indian Micro and Small & Medium Enterprises (FISME), gives more insight into this. He says 10-15 per cent MSMEs which were part of the VAT regime, the transition was not painful. However, it is the smallest companies, the micro enterprises which were not part of the formal sector, are the worst hit.
"In the pre-GST era, up to a turnover of Rs 1.5 crore, manufacturing enterprises were not required to charge and deposit tax. But because of this, whatever taxes you paid on inputs become part of your cost. The government gave this option keeping in view that even if they're earning 3-4 per cent of value addition or even 10 per cent of value addition, the firm was only holding back the tax of that value added part, because on raw material purchases, they had already paid taxes. Now, that has changed in the post-GST regime and that has become a problem," says Bharadwaj.
Meanwhile, revenue secretary Adhia says the government thinks that GST has led to some amount of formalisation of the MSME sector and that has helped them. "Now, that they are in the GST net, they can prove that they have basic minimum revenue, which has improved their chances of getting credit from banks. The credit offtake of MSMEs have gone up," he says.
According to the government, the number of registered taxpayers have jumped from 64 lakh under the earlier tax regime to over 1.12 crore, a 40 per cent increase. This means that as many as 48.40 lakh new dealers have entered the new tax regime indicating formalisation of the economy.