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GST Council should consider six monthly returns for very small traders on a voluntary basis: Arvind Virmani

"Uniform rate is most important for intermediate goods. They have gone the other way which is not a good augury."

ET Now|
Updated: Oct 07, 2017, 03.54 PM IST
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"   World over, the VAT has been used as a way of simplifying domestic taxation of imports and of taking taxes out of the exporters. Here for some strange reasons which I still do not understand but which does not matter now, we did the opposite. Very strangely, we use the GST actually to increase the component of taxes implicitly into exporters which was the oddest thing to do."
" World over, the VAT has been used as a way of simplifying domestic taxation of imports and of taking taxes out of the exporters. Here for some strange reasons which I still do not understand but which does not matter now, we did the opposite. Very strangely, we use the GST actually to increase the component of taxes implicitly into exporters which was the oddest thing to do."
As part of the India Development Debate, Supriya Shrinate and Sandeep Gurumurthi of ET Now, discuss with Arvind Virmani, President, chintanlive.org, the GST reboot and the Diwali Dhamaka for SMEs & exporters.

Edited excerpts:


Supriya Shrinate: Changes have been recommended for categories across the spectrum-- is this a big reboot of the GST that was launched three months back or is this a tweak according to you?

Arvind Virmani: It is a start and let me put that in true perspective. Many people were saying do not make any rate changes, do not make any major changes it will create uncertainty. What I had said was that the way the system has been set up is creating uncertainty so you have to make changes which will reduce the uncertainty that is one point.

The second point is that I am happy that the GST Council had given the impression that it was concerned only with the revenues that states could get collectively and the centre. This move shows that they have heard the people and now we have actual experience, they have realised that there are changes which have to be made and must be made within the first year. So, this is very welcome and I am glad of it.

The third point which I think the Finance Minister emphasised and which will form the basis is that 90% of the filers pay roughly 10% of the tax. The compliance burden on the basically tiny, small and to some extent the middle income people have to, be reduced. That has been the principle and hopefully over the next six months or so, it will be implemented.

One final small point we can discuss further is a point which I made six months ago or so in a blog, that the uniform rate is most important for intermediate goods. They made a start in implementing that but they have also gone the other way which is not a good augury.

Sandeep Gurumurthi: I want to understand the big picture as far as SMEs are concerned and how much the compliance burden has been eased. You spoke about the fact that 90% of these are small and medium enterprises. Do you believe enough has been done to reduce the compliance burden? There is one specific point that we spoke about quarterly filing of returns for people up to 1.5 crore. Could they have gone the full distance and why not just get away from this business of invoice matching for B to B transactions because that many believe is breaking the supply chain. Could they have just said that do this invoice matching only for IGST and do it away otherwise? Would that have cut procedural delays and helped reduce compliance cost further?

Arvind Virmani: I just want to clarify that among the SMEs, there are also traders as well as service providers. I do not know the proportion, but a large proportion of these are final goods and service providers. They will not be the problem. It only applies to intermediate good suppliers who are supplying to large companies who will still be filing monthly returns and then the matching can only occur in the quarter. But as I said, according to the figures given by the finance minister that will only constitute less than 10%. Much of that may be final sale out. Only 2 % or 5% is going from the small scale sector to the large. There could be a little bit of a problem but it is manageable and small enough for the government to have some simple rules that you can collect it after a month or something. It is not an insurmountable problem.

The second part is I would urge the GST Council should be even more flexible, if it is necessary to bring more people into voluntarily compliances instead of having to use the danda for everything. I would even urge them to consider six monthly returns for the very small traders and six monthly returns for the very tiny and small trade services, again purely on a voluntary basis.

We have this composition scheme and that taken with the monthly thing is a great relief but I would urge them to think even more broadly in an integrated way about this 90% which they are saying only provide 5% to 10% and it can be simplified even further so that people will feel happy to join given this new atmosphere that everybody has to pay taxes etc.
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Supriya Shrinate: If you put it all together does this kick start Indian exports? I know Indian exports are down to levels of 2% growth from the historical 25% growth but will this get the ball rolling as far as exports are concerned?

Arvind Virmani: Exporters I have talked to were expecting a collapse in exports. But let me tell you about VAT. World over, the VAT has been used as a way of simplifying domestic taxation of imports and of taking taxes out of the exporters. Here for some strange reasons which I still do not understand but which does not matter now, we did the opposite. Very strangely, we use the GST actually to increase the component of taxes implicitly into exporters which was the oddest thing to do frankly, but good that they have recognised this and have actually resolved the exporters’ problems by using the e-wallet.

The important thing is to resolve it and get back to what is a real VAT system for exports and imports. It will certainly improve the export performance above what it would have been if nothing had been done but of course there are two other important measures and what we find is that the real effective exchange rate (REER) does not have a negative effect on all exports but it seems to effect more on the labour intensive and more standardised products.

Even if the effect of REER appreciation is to increase which is very counterintuitive I would not go into the technical details of the overall value of exports it has the opposite and negative effect on labour intensive.

Certainly from the point of view of employment, jobs etc. which we keep talking about, this exchange rate is very important.

Supriya Shrinate: This was a very UPA thing to do when decisions could not be arrived at, set up a GoM . It shows incapability to take decisions. We thought this government would take decisions but it looks like under mounting pressure from states, a GoM has been set up to now look at rate cuts, especially in areas like restaurants. How do you read that?

Arvind Virmani: There are three issues here -- if the revenue neutral rate is between 15 and 18%, it is generally a bad idea to reduce anything below 15% and further down, that is a bad move. It will make it more difficult to get to the neutral rate.

Number two, if there is a single item -- whether it is a service like a restaurant, service or a good where they put multiple rates -- there is no harm in the transition of integrating these.

Some of these are going in that direction. Some are going in the opposite direction. I would support the former but oppose the latter.

The third rate tinkering is on as I head mentioned earlier on intermediate goods which were put at 28%. Now, that was bad. If that is being reduced to 18%, it is good. If it is moving away from 18%, it is bad. This tinkering was there inherently in the way the GST operated and that is where the GoM comes in. There were all these diverse interests which were asking for different rates on different things. The GoM will have representatives instead of having 30 people pulling in every different direction and they would may be have three special interest groups.

If an effort is made, this GoM with reduced number of people arguing may actually help move us in a direction of simplification of rates if it takes up that as one of its responsibilities.

Supriya Shrinate: There are two ways to look at what has happened yesterday. One way is that the government is keeping its ears and eyes extremely close to the ground and is reacting and is receptive to complaints and issues that are being brought up. The other way to look at it is that the government rushed into the GST and these nitty-gritty were not really taken care of. How are you going to read this situation?

Arvind Virmani: There are two components of the complexity of the system. One is the bureaucratic component. The GST Council has so far focussed only on the bureaucratic part which obviously is easy for everybody to understand. The more difficult part is they do not understand is the VAT principle on which it is based all across the world. Simplification of the rates will actually increase revenues over let us say a one and more year period. Once they understand this thing, the GST can be drastically modified without affecting revenues or equity.

A simple system can be equitable but anyway that part remains and till they do that, the full promise of the GST will not be met. We will get better compliance from smaller people. There will be less complaints but the big promise of productivity and growth of 1% to 2% etc. which is very feasible will not happen unless they start focussing on simplifying the rates structure.

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