GST to end of informal sector?

 

• The tax evasion propensity of Indians stem from some deep seated hangover from feudal times when the state was exploitative and citizens considered taxation system as - exorbitant and arbitrary; fundamentally illegitimate; excessively burdensome; irrationally complex; patently corrupt; simple greed. It is usually a varying combination of the above. As long as people are poor and less educated and governments are irresponsible, inefficient and blatantly corrupt in public spending, efforts for higher tax realizations will be thwarted by its citizens.
• GST is supposed to absorb informal sector into formal economy and result in higher payment of taxes to exchequer with builtin incentives for compliance. This also leaves trails of transactions making difficult for the GST dealer escape from income tax. 
• Any tax policy is as good as it is administered. One of the worst effected wings of government by 'corruption' are commercial and income tax departments. So without even evaluation it can be safely concluded that GST would have very limited success in increasing tax realization, at least to begin with.
• Without tax evasion what would chartered accountants and lawyers would do? At least 50% of them are engaged in tax evasion activities not only in India, but world wide.
• No one in the world pays taxes smilingly. That would be very strange economics and irrational. Even in USA, income tax compliance is estimated at 80% and they are proud of it as an achievement. For India to reach that level it would be long and focused journey.
• The informal sector dealer is now compelled to maintain books of accounts, raise invoices for all transactions, pay income tax, file GST and IT returns etc. This increases its over heads reduces its inability to operate on razor thin margins, raise funds with high interest rates etc.
• Informal sector owned by less educated people and operated by semi skilled people get no support from government, banks or institutions and survive on their own with their borrowing interest rates as high as 36% per annum and survive on razor thin margins. They work long hours with less or no holidays and provide livelihood to 90% people and contribute to GDP by over 45%. Most of them doesn't have enough margins to comply with GST requirements. GST is an attempt to destroy them and is not in national interest. Unless government provides as much support they provide to formal economy they have no business to interfere in their working. Just because government issued a fiat, they are not going to wind up their activity and vanish. They will survive adjusting in what ever the way it is possible. The corrupt officers will end up squeezing out more money from them.
• So far 'cash economy' and 'white economy' are largely intertwined. With GST making such things difficult 'cash economy' will run in parallel with 'white economy' which is even more dangerous.
• Those who can modernize, raise bank loans for its working capital etc will go ahead and survive or they will completely migrate into 'formal economy'. Lacking intrinsic financial strength and ability to comply with the complexities and overhead expenses most will opt for going out completely into 'cash economy'.
• This would result in one more layer between consumers and manufacturers with proportionate increase in prices. 
• This parallel 'cash economy' will thrive unless GST rates are brought down to below 10% which renders 'cash economy' nonviable.

Anywhere in the world in the past, GST was adopted by several countries to streamline business activities so that tax compliance becomes simple, affordable and hassle free. In Australia, with full one year preparation, GST roll out impacted economy significantly and intangible benefits started accruing after two years. Only in India, mangled GST (which is no different to VAT) was seen as sacred cow which would eliminate tax evasion, increase tax collections for governments and would push GDP growth upwards. Impatient to wait for preparations to get completed which needs about an year, GST was rolled out with in 3 months with weak GSTN infrastructure and ample confusion everywhere. Expectedly, economic activity was seriously impacted and informal economy got adjusted with cash transactions and loss of jobs were enormous in SME segment. And now Govt is looking towards sky for God's help, who in any case won't help any one. Govt pundits must understand that incentivisation means not refunding a portion of tax paid on compliance but minimise taxes so that voluntary compliance increases. Finally, no matter what our pundits in ivory towers do, informal economy is going to stay in some form or other for many more years or even decades.