.

CENTRE FOR NEW ECONOMICS STUDIES

(CNES)

Short-Term Impact of GST on Small & Medium Businesses

across India:
Reflections from Case of Local Markets in Uttarakhand and
Kerala.

Aryan Agarwal
Research Analyst, Centre for New Economics Studies (CNES). O.P.Jindal Global University.
Email id: [email protected]
Richa Sekhani
Senior Research Analyst, Centre for New Economics Studies (CNES),O.P.Jindal Global University.
Email id: [email protected]
&
Deepanshu Mohan1
Assistant Professor of Economics & Executive Director, Centre for New Economics Studies (CNES).
O.P.Jindal Global University.
Email id: [email protected]

1
Offered editorial assistance in conceptualizing and writing the reported study. The authors
would also like to acknowledge Mr. Danish MC (Research Assistance, CNES) who provided
research assistance in collecting, documenting primary field interviews from the city of
Malappuram (Kerala).
 Table of Contents

1. Introduction 03
1.1 Methodology 04
2. Taxation in India 07
2.1 GST at a Glance 10
2.2 Impact of GST on Indian Economy 14
3. Findings from the Survey 16
3.1 Registering the GST number 16
3.2 Tax Returns and Increased Compliance Costs 17
3.3 Visits to Tax Practitioners 18
3.4 Reasons to Remain with the Informal Sector 19
3.5 Wider Impact on the Economy 21
3.6 Other Observations 21
4. Limitations of the Study 23
4.1 Methodological Challenges 23
4.2 Logistic Challenges 24
5. Conclusion 24
Annex 1: Questionnaire 26
Annex 2: The complete list of new GST rates 27
6. References 29

2
 1. Introduction

Heralded as one of the biggest indirect tax reforms in India after Independence, the
implementation of Goods and Service Tax (GST) on 1st July, 2017 promised to replace the
complex multiple indirect tax structure of India.1

The idea of GST was conceived by the taskforce on the implementation of the Fiscal
Responsibility and Budget Management Act, 2003 (Kelkar Committee) to address the
complex system of indirect tax rates that prevailed under the indirect tax regime. According
to the Kelkar committee, nationwide dual GST was seen as a solution to achieve ‘a common
market, widen the tax base, improve the revenue productivity of domestic indirect taxes and
enhance welfare through efficient resource allocation’.2 Considered as a destination-based
consumption tax levied at multiple stages of production and distribution of goods and
services, the (indirect) tax seeks to introduce a uniform rate of taxation for all goods and
services that are bought and sold across India and therefore, substitute the complex and
questionable tax structure with one that is poised to simplify tax structures, while making
India an attractive destination for investment and business.

While GST has been perceived as a potential ‘game-changer’ in its attempt to ensure a
common market in India by dismantling inter-state tariff barriers and bringing in compliance
and advocacy; its implementation in the short-term3, however, has also impacted small and
medium enterprises (SMEs) by increasing the operational costs and impacting profitability.4
GST, for instance, requires the purchase invoices to be reconciled with the supplier of the
goods. These invoices have to be uploaded by the entity by the 10th of every month and will
need to be reconciled by the 15th of every month.5 This makes the compliance stringent,
especially for SMEs who are typically not used to managing complex tax compliances. SMEs,
in particular, have to hire or consult with GST experts to bring about a technology makeover
resulting in additional expenses.

Since the implementation of GST, few empirical studies have come out, trying to analyze the
impact of the tax (and its cascading effects) on small and medium scale enterprises across
states. This study aims to bring together a detailed and ethnographic account of GST and its
effects in the states of Kerala and Uttarakhand by capturing oral interviews of (small scale)
manufacturers and traders/merchants. The researchers in this study have conducted a field
survey of 40 business (wo)men from Rudrapur (Uttarakhand) and Malappuram (Kerala) to
assess:

a) Problems faced and cost of moving from previous tax system to GST
b) Effect on compliance cost
c) The degree of Transition from informal to formal sector

3
This study, therefore, attempts to comprehensively build a case for contextualizing the short-
term impact of GST on SMEs and their operation.

1.1 Methodology

The study followed a mixed method approach involving more focus on qualitative research
techniques. There was an extensive reliance on questionnaire-based interviews and oral
inter-personal accounts. For obtaining the primary information through a participation-
observation framework, the targeted market spaces were visited in Rudrapur and
Malapuram. This gave a better understanding of the physical spaces to be identified for the
study and helped in bringing together a detailed and ethnographic account. This framework
has its root in traditional ethnographic research that serves as a check against participants’
subjective reporting of what they believe and do.6

Inter-personal ease in getting interviews in known geographical spaces (given the budget
constraints) motivated researchers to conduct the interviews in cities of Malappuram and
Rudrapur. The remoteness of these cities from the respective state (and Union) capitals also
helped us in getting a more nuanced perspective on the impact of the GST on the supply
chains across North and South India.

Figure 1: Malappuram on Google Maps

4
 Figure 2: Rudrapur on Google Maps

Table 1: Description of the surveyed locations

Rudrapur (Uttarakhand) Malappuram (Kerala)

Rudrapur is an Urban Agglomeration in Malappuram is also an Urban

Udham Singh Nagar district of Agglomeration situated in Kerala, India.8
Uttarakhand, India. Located in the fertile Located in the southern-most state of the
Terai region, the city is home to over 150 country, the city has a total population of
thousand people. over 1.5 million people. It also serves as the
administrative headquarters of
Over the past two decades, it has witnessed
rapid economic growth and development Malappuram district and boasts of a strong
due to the establishment of an industrial trader community in which hotels and
corridor, State Industrial Development bakery businesses are rampant, followed
Corporation of Uttarakhand (SIDCUL).7 by textile and medical sectors.9

5
The cities of Rudrapur and Malapuram were chosen because of the following reasons:

1. The cities host large communities of traders.

2. Both the cities are urban agglomerations.
3. Being the respective hometowns of the surveyors, the cities allowed familiar access
to the spatial distribution of small and medium scale businesses.

Based on the questionnaire (See Appendix 1) prepared for merchant interviews, we

collected 40 samples of oral accounts providing detailed insights into each of these targeted
market spaces. Based on the participant-observation and interaction, a broader
conceptualization of GST and its impact on SMEs is developed. The questionnaire was
formulated with respect to the scope and objectives of the study, which enabled us to acquire
the relevant information for the purpose of our study.

Table 2: Sectors surveyed for the study

City Rudrapur Malappuram

Manufacturing Sector 8 8

Service Sector 12 12

Tax Practitioner 3 1

Total 23 21

Table 3: Businesses surveyed for the study

Number of Number of
Service Sector Interviews Manufacturing Sector Interviews

Restaurant 3 Chemical Factory 3

Ration wholesaler 2 Floor Mill 2

Ration retail seller 2 Seed Plant 2

Medical wholesaler 3 Pole Manufacturer 1

6
 Furniture retail 4 Jewellery Maker 1

Power-back up retail 1 Plywood 1

Crockery and Home Appliances 2 Carton Box 1

Jewellery 3 Pipe 1

Mobile and Computer Hardware 2 Packed Food 1

Footwear Retailer 1 Total 13

Marble Retailer 1

Recycled Plastic wholesaler 1

Architecture 1

Electrician and Plumber 1

Total 27

The use of such an ethno-personal methodology helps in understanding the physical, social,
cultural, and economic context of the participants by understanding the relationship among
people, contexts, ideas, norms behaviors, and the activities they do. Since the findings of the
study are largely derived from interviews and conversations with vendors, this technique,
also involves its own challenges and limitation which are further explained in the paper.10
The section to follow will provide background to Indian tax regime pre and post GST
implementation. The detailed analysis of these markets is explained in section 3 of the
report. Section 4, documents the limitation and is followed by a conclusion.

2. Taxation in India

The Indian economy has followed a progressive tax system by charging more to the higher
income brackets compared to the lower ones.11 However, the government income share
from direct taxes is as low as 6% of the GDP.12 The majority of tax collected is in the form of
indirect taxes,13 which is considered as regressive in nature due to its equal monetary
burden on the rich and the poor. The tax is levied on the expense incurred by the individual
irrespective of their income.

7
Previous to GST regime, India followed a dual system of taxing goods and service which is
quite different from dual GST

Figure 3: Pre-GST Tax Structure14

Indirect Tax Direct Tax

Central State Government Income Tax Wealth Tax

Government
VAT, Entertainment
Excise duty, Tax, Service tax and
Cutoms, Service Entry tax
Tax

Central Government levied

a) Income tax on income of an individual

b) Custom duties on exports and imports of goods
c) Service tax on various services and
d) Central excise on manufacturing of dutiable goods

On the other hand, state government levied

a) Value Added Tax (VAT) was a multi-stage tax levied at each step of production of
goods and services which involves sale/purchase. The person earning an annual
turnover of more than Rs.5 lacs by supplying goods and services was liable to register
for VAT payment and levied both on local as well as imported goods.
b) Besides, Stamp duties and Land revenue were also generated by states on transfers
of immovable properties.
c) In addition, to these taxes, state excise on liquor and certain agricultural goods were
imposed.

Further, there were some local indirect taxes levied like Local Body Taxes (LBT) or Octroi
that were charged. As a result, the pre-GST regime suffered various challenges as it had made
the system of taxation very complex. Few of the challenges cited by various literature
include:

8
 a. Tax Dropping: The most significant contributing factor to tax cascading is the partial
coverage by Central and State taxes. Sectors that are exempted were not allowed to
claim credit for the CENVAT or the Service Tax paid on the inputs. Under GST the
entire concept of CST has been eliminated with the introduction of IGST.

b. Compliance Issues: Previous to GST, there existed separate laws for a separate levy.
For instance, Central tax Act 1944, respective state VAT laws etc. With GST regime,
the laws were subsumed. This made compliance with tax complicated.

Table 4: Taxes subsumed and not subsumed in GST15

Subsumed in GST Not Subsumed in GST

Service Tax Electricity Duty
VAT/ Sales Tax Basic Custom Duty
Central Tax Toll Tax
Entertainment Tax Alcohol for Human Consumption
Tax on Lottery Property Tax
Luxury Tax
Purchase Tax
Entry Tax

c. Previous to GST, separate rates for Excise and service Tax @14% existed. With GST
in place, all the tax rates have been subsumed under one Central GST (CGST) rate and
a uniform rate of State GST (SGST) across all states.

d. Fourthly, the previous regime levied taxes at two stages; production and
consumption, i.e., when product moves out of the factory and also at the retail outlet
which made the system non-transparent. With the new regime, GST gets levied only
at the final destination of consumption and not at various points. This brings more
transparency and corruption-free tax administration.

e. States under the previous regime were unable to levy taxes on services: they had no
powers to collect tax on incomes or the fastest growing constituents of consumer
expenditures. The States have to rely almost exclusively on compliance
improvements or rate increments for any flexibility in their own-source revenues.

9
 f. Besides lack of uniformity in provisions and rates and interpretational issues
(whether an activity is sale or work contract, sale or service) made the system very
complex.

The multiplicity of taxes and tax base being fragmented between Centre and States have
resulted in a complex system of interconnected legislations leading to substantial
distortions, cascading of taxes and adversely affecting growth in Gross Domestic Production
(GDP) had led to the advent of new tax regime in form of GST.16

2.1 GST at a Glance

GST is defined as a destination – based consumption tax levied at multiple stages of

production and distribution of goods and services.17 The regime considers goods and
services alike and within the supply chain, are taxed at a flat single rate till the customers
can access them. This tax reform thus gives equal footing to large and small and medium
enterprises and taxes the stock transfers uniformly. 18

The concept of GST was visualized for the first time in 1999-2000. In 2004 -05, the Kelkar
Committee recommended rolling out GST as suggested by the 12th Finance Commission.
Following the same recommendations, Finance Minister P Chidambaram in February 2006
proposed a GST rollout, by 1 April 2010. However, the resignation of Asim Dasgupta as the
head of the GST committee halted the reform.19

On 8 August 2016, the Constitutional Amendment Bill for GST was passed by the Parliament,
followed by ratification of the bill by more than 15 states and its enactment in early
September.20 The Goods and Services Tax was finally launched at midnight on 1 July 2017.
The launch was marked by a historic midnight (30 June – 1 July) session of both the houses
of the Parliament convened at the Central Parliamentary Hall.21

With the implementation of the GST, all registered persons have to file monthly return by
20th of the succeeding month.22

10
 Figure 4: Timeline of GST 24

GST rollout in India is dual based; both centre and various state government levy GST
separately with central government levying CGST and state government levying SGST.
However, the basis for classifying, measuring and charging the taxes are same for both the
government. Another salient feature of Indian GST is that it will eliminate the cascading
effect of various state and central taxes by subsuming various state (VAT, entertainment tax,
entry tax, luxury tax etc.) and central taxes (central excise duty, service tax, additional
customs duty etc.) within the ambit of GST.23

Levied on the sale of goods and services, it is hailed as “One nation one tax” system to unite
indirect taxes under one umbrella and facilitate Indian businesses to be globally
competitive.24

11
 Figure 5: Business Impact of GST

Source: Ernst and Young

Since its implementation,

 GST has increased the number of unique indirect taxpayers by more than 50%.25

 There are 3.4 million new indirect tax registrants. The level of tax filers by November
2017 was 31% greater.26

 The Finance Minister stated that 7.2 million of the 8 million indirect tax assesses
under the earlier tax system have migrated to GST, while 1.3 million new taxpayers
have also signed up under the new system, indicating the tax base is set to widen
significantly by the end of the year. 27

The GST was structured for efficient tax collection, reduction in corruption, and easy inter-
state movement of goods, among others.28 However, it got divided into five slabs for
collection of tax—0%, 5%, 12%, 18% and 28%. Petroleum products and alcoholic drinks are
taxed separately by the individual state governments. There is a special rate of 0.25% on
rough precious and semi-precious stones and 3% on gold.29 In addition, a cess of 22% or
other rates on top of 28% GST applies on a few items like aerated drinks, luxury cars, and
tobacco products.30

12
 Table 5: Rates Classification for Goods and Services

Exempt 5% 12% 18% 28% 28% +

Cess
Food Worn clothing Condensed milk Escalators Pan Small
grains Fly ash Printing ink Fork lifts, lifting and masala cars
Cereals Fishing net and Specified parts handling equipment Cigars (1% /
Milk fishing hooks of sewing Electrical apparatus 3%
Jaggery Sulphur machine for radio and cess)
Common recovered in Furniture wholly television
Salt refining of made of bamboo broadcasting Luxury
crude or cane Chocolates cars
Diabetic food Rubber tubes and (15%
miscellaneous articles cess)
of rubber
Slabs of marbles and
granite
Detergents

Table 6: Rate classification for services31

Exempt 5% 12%-18% 28%
 Education  Goods transport  Works contract  Betting
 Healthcare  Rail tickets (other than Business Class air  Gambling
 Residential sleeper class) travel  Hotel/ Lodges
accommodation  Economy class air  Telecom services with tariff above
 Hotel/ Lodges with tickets  Financial services INR 7500
tariff below INR 1000 Cab aggregators  Hotel/ Lodges with
 Selling space for tariff between INR
advertisements in print 1000 and 7500
media
Source: Ernst and Young

Only rates of select goods and services have been mentioned here
 GST rate on pearls, precious or semi-precious stones, diamonds (other than rough
diamonds), precious metals (like gold and silver), imitation jewelry, coins – 3%32
 GST rate on rough diamonds – 0.25%

13
However, the rates and the products that were envisaged under the GST has witnessed
continuous modification which has affected the businesses and compliance costs.

After 25th GST council meeting GST rates on 29 goods and 53 services were revised.33
Annexure 2 provides the modified list of goods and service that has been revised.

2.2 Impact of GST on Indian Economy

India is neither the first nor the largest economy in the world to implement a single tax.
Previously, developed countries including France, United Kingdom, Canada, Australia, and
developing countries like Brazil have implemented a single-tax system.34 However, as seen
in the image below, the rate of tax is highest in India.35 Not just high tax rates but the system
of multiple slabs has also been widely criticized by the experts.36

Figure 6: GST rates around the world 37

30

25

20

15

10

The expectation of GST being introduced is high not only within the country but also within
neighboring countries and developed economies of the world. A paper by US Federal Reserve
estimated that the goods and services tax (GST) can boost India’s GDP growth by up to 4.2%
— double the previous estimate — as lower taxes on manufactured goods will bump up
output and make products cheaper.38 GST implementation is expected to provide the much-
needed stimulant for economic growth in India by transforming the existing base of indirect
taxation towards the free flow of goods and services.

14
In India, GST implementation has received mixed responses from various stakeholders.
While some business owners have lauded the Government of India for implementing GST,
others are not very convinced. As per industry experts, GST benefits India and its businesses
in the following manner:

a) Ease of starting Business: Under the previous tax regime, a business operation across
different state needed VAT registration. The different tax rules of different states
complicated the procedure. With GST that enables centralized registration, ease of
starting a business and its expansion has become much easier, with an added
advantage for SMEs.39

b) Secondly, GST has reduced the complications caused by overlap between central and
state taxes, thereby removing the cascading effect caused under the previous tax
regime. Filing and paying taxes has also been simplified by GSTN portal.

c) Thirdly, GST has improved logistic system and faster delivery of goods and services
by the removal of entry tax. According to an estimate by CRISIL, the logistics cost for
manufacturers of bulk goods will get reduced significantly—by about 20%. This is
expected to boost ecommerce across the nation.40

d) Lastly, GST ensures that there is no ambiguity between goods and services. This has
simplified various legal proceedings related to the packaged products. As a result,
there will no longer be a distinction between the material and the service component,
which will greatly reduce tax evasion.41

While there is no doubt that GST has been a landmark reform, the multiple tax rates and
exemptions announcements has complicated its easy implementation. As reported by HSBC
the complexities associated with multiple tax rates and exemptions announcements could
deter the input tax credit mechanism and GST would only add 0.4 % to GDP.42 Similarly, SMEs
has expressed reservations about transitioning to GST and getting used to the new tax
regime within a short period of time. Their concerns include increased compliance costs and
numerous returns.43

 The new regime requires that the GST return should be filed on a monthly basis which
is time-consuming. The time that business owners spend filing these returns could
instead be spent on other productive activities, like developing their business and
acquiring clients.

15
  Consistently filing 3 returns a month, periodically reconciling transactions, and
uploading invoices regularly has given rise to the need for an accountant with
technical expertise. Hiring an accountant and paying them, adds to the burden on
small businesses and thereby increases the compliance costs.

 Similarly, the multiple registration systems that takes place online, small business
owners who are not used to working online found the transition difficult.

Additionally, the constant change in tax rates on goods and a frequently crashing website
has further impacted the businesses, in particular, SMEs. Hence for a deeper understanding
of the impact of GST, an ethnographic study was conducted in Rudrapur and Malappuram.

3. Findings from the Survey

3.1 Registering the GST number

Before GST in India, a typical business had to take at least a Service Tax number and Value
Added Tax number. Some businesses had to additionally take Excise number, Customs
number, etc. based on the product and the market they dealt in.44 All these permissions had
government fees ranging from ₹1,000–₹5,000 depending on the tax number applied. Many
processes had to be completed physically.45

As a usual practice in the country, slow bureaucracy led to businesses hiring tax practitioners
or lawyers for the same. These practitioners would charge a sum of government fees and
their service fee (which included unofficial payments made to the government officials). This
bumped up the cost to ₹5,000–₹10,000.

Learning from the previous practices and in order to minimize the transition cost to GST, the
government of India has waived off the GST number application fees by moving the
process online.46 Along with ensuring transparency, the process also helped to cut-off the
government officials who used to charge people in an inappropriate way. However, the
market for tax practitioners has still prospered. These practitioners helped businesses to
obtain GST numbers by charging them from ₹1,500–₹10,000.

Of the 40 total respondents, the average cost of obtaining a GST number was ₹2,320, which
is around 3.5 times less than the cost of obtaining VAT and Service Tax number. When looked
closely, it can be noted that the average cost to obtain a GST number was lower for well-off
businesses as compared to small traders. Many large businesses even made the transition all
by themselves without any cost. On comparing between Uttarakhand and Kerala, the average
cost of obtaining a GST number was 50% less in Uttarakhand

16
 Figure 7: Cost of getting previously existing tax numbers and GST number

12000

10000

8000

6000

4000

2000

0
In Kerala In Uttarakhand

Cost of Tax Number Before GST Cost of GST Number

Source: Authors’ Calculations

3.2 Tax Returns and Increased Compliance Costs

A businessman from Rudrapur The government brought the GST with a notion
running a furniture shop says: to simplify the tax structure and decrease the
compliance costs.47 However, the
“I had to file tax only four times a year, implementation of the bill hasn’t worked out
now it’s twelve damn times! My lawyer the way it was supposed to. While having a
has tripled his fees. In addition, I had conversation with multiple business-owners,
to hire an accountant as well. My cost they disagreed about GST making their tax
has increased to nearly nine times.” returns filing simple.

On an average, the compliance cost has increased by 2.025 times. There are various reasons
for the same.

- Over 90% of the respondents have always used the help of a professional to file their
taxes.
- With the transition to GST, the frequency of tax returns has increased from 4 to 12
times a year.

17
 - The increase in the frequency of tax submission, unclear rules, and a slow website has
caused no fewer problems for the tax practitioners.
- Being unable to complete the same number of files in the given time, the practitioners
are forced to increase their service fees.

Figure 8: Number of times increase in tax compliance cost

2.5

1.5

0.5

0
In Kerala In Uttarakhand

Source: Authors’ Calculations

Not just increase in tax practitioners’ fees, During the interview, a ration seller told:
the infrastructure cost of GST has also
come out to be high for the businesses. “Amdani atthani kharcha rupaiya (Income is half-a-
rupee, expenses a rupee). Just for complying with
Moving majority of the tax submission this system, I had to buy a computer, a printer and
online has helped the system to be some software called Tally. In addition, I have to
transparent. However, it has largely keep a part-time accountant. It cost me more than I
excluded the small businesses which could make in a year. Whom should I ask for this
have no or little capital to set-up money?”
expensive systems.

3.3 Visits to Tax Practitioners

18
The cost of GST is not just limited to increased monetary costs. The implementation of tax
has also increased the number of times a business owner visits a tax practitioner or vice-
versa.

According to the study, a businessman used to visit the tax practitioner only once in two
months. However, with the implementation of GST, the number of visits has increased nearly
three folds to two visits a month. This increase in visits is above and over the increased
compliance costs that the businesses have to pay.

Many surveyors were upset about the same. However, most of them showed an unusual
optimism towards the bill. They were of the belief that it is a short-term pain and with GST
becoming a common practice, the constant to-and-fro rounds will stop.

3.4 Reasons to Remain with the Informal Sector

In 1971, British anthropologist Keith Hart was the first to coin the term ‘informal sector’.
According to International Labour Organization, “Workers in the informal economy include
both wage workers and own-account workers. Most own-account workers are as insecure
and vulnerable as wage workers and move from one situation to the other. Because they lack
protection, rights and representation, these workers often remain trapped in poverty.”48

In India, the NCEUS defines the unorganized sector as “all unincorporated private
enterprises owned by individuals or households engaged in the sale and production of goods
and services operated on a proprietary or partnership basis and with less than ten total
workers".49 According to an estimate, India has a substantial informal economy contributing
20% to GDP. However, most of these firms make profits largely due to non-compliance with
regulatory norms and tax evasion.50 This leads to a shortfall in the government revenues.

Under GST, it is expected that the informal sector will come under the regulatory framework
and paying taxes. The business that don’t make adapt to GST will ultimately shutdown ending

19
 A business man stated the informal sector.51 The government cited
the shifting of the informal sector to the
“If I don’t sell without bill, my buyer will buy formal sector as one of the major victories
goods from ‘X’ ration store for lower prices. Why of GST.52 However, the same is not true
should I let go my customer? When everyone else when we studied the situation on the
is working without bills, why can’t I?” ground. All the businesses that dealt with
the ultimate sellers have continued to sell
He further adds:
their products in the informal market.
“My seller told me to buy with the bill but with
The study revealed no or little shift from
time cheaper options without bills have opened
informal to the formal sector. Only 8 out of
for me in the market. I won’t buy on bill if I can’t
40 businesses have partially shifted to the
sell it on bill. Why should I be the one taking the
formal sector. Further, if we drop the
hit?”
restaurant businesses, only 5 out of 37
businesses show a little shift towards the
formalization.

Figure 9: Percentage business shifted towards formal sector

45

40

35

30

25

20

15

10

0
Kerala Uttarakhand

Percentage shift towards formal sector

Percentage shift towards formal sector (excluding restaurants)

Source: Authors’ Calculations

20
 3.5 Wider Impact on the Economy

The study tried to find out the overall impact of the GST on businesses. In order to do so, the
respondents were asked about their monthly turnovers in 2016 and 2017. Later, a
comparison between the two was drawn.

The turnover growth in Rudrapur, Uttarakhand was nearly flat while the Malappuram,
Kerala showed a negative growth of 25%. The results in Uttarakhand were in line with
expectations while the results in Kerala were rather surprising due to steep downfall.
However, the slowing economy in both the places cannot be blamed completely on GST.

Malappuram is facing regulatory issues due to slump in oil prices and tax on remittances,
whereas Rudrapur businesses have tagged it as a seasonal slowdown due to macroeconomic
factors rather than GST.

3.6 Other Observations

While conducting the survey, the surveyors made efforts to note other key observations as
well.

a) Nearly 100% of the respondents complained about the constant crashing, slow,
time-consuming and non-user friendly GST website.

A businessman from Kerala stated that:

“The constant crashing of GST website is unacceptable. It increases my time spent on

unproductive work. The government should take help of multinational companies
who have very good websites which doesn’t even crash when there is a huge influx of
people visiting it simultaneously.”

Since the launch of GST, the website is constantly crashing or running slow. This is causing
businesses to spend more than usual time on the website to file their tax returns. During the
peak hours or last day of the tax return, the website crashes frequently.

A businessman from Uttarakhand said: “I was feeding data early in the morning but
forgot to bring some of my documents to office. I went back to my home for
collecting the left files. On logging back at 11.30 am, I saw that all my data had
vanished in the ‘cloud’. No issues, now I will sit again and do this again for another 4
hours.”

21
 b) The number of returns filed in GST are a lot more than the previous tax system.

c) Taking input tax credit is much more difficult now.

It was observed that the businesses felt it was difficult to get GST tax credit input. Some
businesses in the supply chain do not file or delay their tax returns causing problems for
others.

Another businessman from Rudrapur said:

“When there was VAT, I didn’t worry about whether someone is filing their tax or
not. Now, it has become my duty to buy product, sell it at profit, collect bill, file tax
return for myself, and also ask the selling party to file his tax return. There should
be some easy way out to make him responsible for the same.”

d) The frequent changes in tax rate have made businesses skeptical of maintaining
inventory to the fullest capacity. The business owners are worried that the high-tax-
rate inventory will bring them a loss. Since the implementation of the GST, there have
been multiple changes in the tax slab of a large number of goods.

Table 7: Changes in GST rates 53

GST Council
Date Major Changes
Meeting Number

1 July 2017 GST implemented

19 17 July 2017 Increase in cess on cigarettes

20 05 August 2017 Rate change on textile job works, tractor parts

Increased cess in automobiles ; decrease in GST rates

21 09 September 2017 for 40 products

22 06 October 2017 GST rate cut for 27 items

23 10 November 2017 GST rate change for 200 items

24 16 December 2017 Decision on implementation of e-way bill

Handicraft made tax-free; tax revised on 29 items

25 18 January 2018 and 53 services

22
This has helped the government to lower the price of essential daily goods. However, it has
hampered the businesses dealing in these goods. The return of fines imposed before
relaxation in rules is also another challenge faced by businessmen.

A ration seller said:

“I had 25 tons of surf (detergent powder). I bought it at 28% GST. Overnight the
government reduced the tax to 18%. Now I run in deep loses. I can’t even sell it at my
buying price.” He further adds, “They (government) say that they will refund our
losses, but who knows? 10 other shop-keepers in the town are also facing losses. I
don’t think we will get refund from the government. Let’s see what happens.”

Another one from Kerala stated:

“I have paid fine for inconsistencies in filing of tax which was later relaxed. Nobody
has any clue about how to get back the fine paid by me.”

Such frequent changes in taxes are forcing businesses to lower their inventory, thus,
hampering them from dealing at that their fullest capacity.

e) Business owners seem to be welcoming the move to implement the e-way bill. Many
of them believed that this will help stop black marketing.

f) The implementation of GST has certainly daunted the business. The businesses are
paying more for compliance with tax, buying software, hiring accountants, and
visiting their practitioners more often. However, there seemed an unusual optimism
and confidence about the economic robustness and its recovery.

4. Limitations of the Study

4.1 Methodological Challenges

It was difficult to convince participants to answer questions on sensitive topics like business
turnover and work done without bills among others in the interviews. Therefore, the
surveyors were required to be flexible and open to deviations from the respondents. Though
this technique, undeniably, has its own advantages, it also involves the risk of steering the
conversation into a direction of little relevance to the objectives of the research.

A crucial part of the interview involved the researchers disclosing their identities and
objectives at an early stage. While this technique drastically reduced the resistance and

23
helped overcome trust vacuums, it also brought into play a set of challenges in the form of
‘reactive effect’.54 The trust deficit between the respondents and the researchers remained
high despite being from the same town. It became even more difficult to get answers to
personal questions.

There were many cases where the business owner did not fully understand the tax process.
Most of their work was either left to their office staff or the tax practitioners hired by them.
There were a few occasions where the surveyors had to call or meet the firms' tax
practitioners to get answers. These practitioners were even more skeptical about the
surveyors.

4.2 Logistical Challenges

Sample size stood as another limitation of the study. Owing to the variation in the number of
vendors across the markets, an accurate representation of the product market remains
questionable. A sampling error may exist where a sample set may not truly represent the
population. Finding multiple businesses from the same sector was another issue that the
surveyors faced.

The geographical location of the survey is concentrated at two major places, Rudrapur and
Malappuram. The surveyors would have ideally wanted the coverage of the survey to be
wider and at different locations. However, despite everything, the businesses who agreed to
be a part of the survey were helpful and tried to respond with maximum details to the
surveyors.

5. Conclusion

The study report provides a detailed insight into the short-term impact of GST
implementation in the markets of Rudrapur, Uttarakhand and Malappuram, Kerala with a
detailed account of the previous tax structure in India and how the GST was implemented in
the first six months (from July, 2018). We found that the transition cost of businesses from
the previous tax structure to GST was somewhere around ₹2320 (depending on the nature
of the business activity). This amount was 3.5 times less than the cost of obtaining the VAT
and service tax numbers in the past. Although the transition cost wasn’t too high, 90% of the
businesses had to face difficulty with the increased fees of professional tax practitioners who
file taxes on their behalf, resulting in a 2.025 times increase in the compliance costs. The
implementation did not increase just the tangible cost but also the intangible as the visits of
the businesses to the practitioners multiplied three times.

Another major reason cited for implementing GST was ‘formalization of the informal sector’.
However, as shown in the Analysis section of the study, there was no major shift seen from
the informal to the formal sector (in accounting terms). Further, we also observed the degree

24
of discontent amongst businesses in Rudrapur and Malappuram because of ever-changing
tax rates, constant crashing of GST website, complex input tax credit system, and increase in
the number of returns filed. From this study alone, it will be difficult to conclude that
businesses faced a slowdown due to the implementation of the tax reform. However, it could
be concluded that the small and medium businesses are facing an enormous threat from the
increase in compliance costs which pushes the gross ‘end’ prices of products.

25
 Annex 1: Questionnaire

1. Which sector of economy fits your business the best?

a. Agriculture

b. Manufacturing

c. Service

2. What was your monthly turnover before GST?

3. What is your monthly turnover after GST?

4. What was your one-time cost of getting Service Tax number and VAT number (any other
tax, if applicable)?

5. What was your first time cost of getting GST number?

6. What was the infrastructure cost of complying with GST (if any)?

7. Do you have any tax input credit left while transacting to GST? If yes, how much in rupee
and percentage of your monthly tax?

8. How many times (annually) did you pay tax before GST?

9. How many times (annually) do you have to pay tax after GST?

10. Which month GST did you last file?

11. Is there an increase in professional compliance cost (if yes, by how much)?

12. What were your visits (per month) to your CA and lawyer before GST?

13. What were your visits (per month) to your CA and lawyer after GST?

14. How much of your work has shifted from informal to formal sector due to GST?

Procurement -

Sales -

15. Do you plan to rebut your GST number? If yes, why?

16. Any other comments or problems that you are facing?

26
 Annex 2: The complete list of new GST rates

According to NDTV,

List of goods in which GST reduced from 28 per cent to 18 per cent

1. Buses, for use in public transport, which exclusively run on bio-fuels.

2. Old and used motor vehicles (medium and large cars and SUVs)

List of goods in which GST reduced from 28 per cent to 12 per cent
All types of old and used motors vehicles (other than medium and large cars and SUVs

List of goods in which GST reduced from 18 per cent to 12 per cent

1. Sugar boiled confectionary

2. Sugar boiled confectionary
3. Fertilizer grade Phosphoric acid
4. Bio-diesel
5. 12 types of bio-pesticides
6. Bamboo wood building joinery
7. Drip irrigation system including laterals, sprinklers
8. Mechanical Sprayer

List of goods in which GST reduced from 18 per cent to 5 per cent

1. Tamarind Kernel Powder

2. Mehendi paste in cones
3. LPG supplied for supply to household domestic consumers by private LPG distributors
4. Scientific and technical instruments, apparatus, equipment, accessories, parts,
components, spares, tools, mock ups and modules, raw material and consumables required
for launch vehicles and satellites and payloads

List of goods in which GST reduced from 12 per cent to 5 per cent

Articles of straw, of esparto or of other plaiting materials; basketware and wickerwork

Velvet fabric (with no refund of un-utilised input tax credit)

List of goods in which GST reduced from 3 per cent to 0.25 per cent:
Diamonds and precious stones

Here's the list of goods that got expensive:

List of goods in which GST increased from 12 per cent to 18 per cent
Cigarette filter rods

27
List of goods in which GST increased from nil to 5 per cent
Rice bran (other than de-oiled rice bran)

Apart from this, changes have been recommended in compensation cess on certain goods
and Integrated Goods and Service Tax (IGST) rates.

28
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28
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ibid 4

31
40
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32
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54
ibid 7

33