Their Capitulation is Complete

  • Shakil Qallander
  • Publish Date: Jul 21 2017 9:07PM
  • |
  • Updated Date: Jul 21 2017 9:07PM
Their Capitulation is Complete

                                        Illustration by Suhail Naqshbandi/KI

By agreeing to GST, the PDP-BJP regime has irreparably damaged Jammu and Kashmir’s autonomy and economy

 

Contrary to the government’s claims, the Goods and Services Tax leaves Jammu and Kashmir a loser on all fronts -- political, economic and administrative. Let me explain.

 

Political loss

Section 5 of J&K’s constitution empowers the legislators to enact and pass laws on all matters except for those pertaining to defence, external affairs and communications. 

Over the past seven decades, the state’s power to enact laws has been gradually eroded, not least because successive state governments have collaborated with Delhi to deceitfully extend 46 amendments to the Indian constitution, passed by the parliament, to J&K. 

The 101st amendment introduced three new articles -- 246A, 269A and 279A. 

Under 246A, the parliament retains the power to levy and collect taxes on interstate trade, which was earlier the domain of the states. Now, for fixing and levying CGST, the laws will be made by the parliament and for SGST, the assemblies can enact the laws, but they will be uniform across states. In the case of the latter, too, 3/4th of SGST will be decided by the parliament, leaving only a fourth with the state (this minuscule part is also subject to many rulings). In essence, the state powers stand decimated.

By virtue of 269A, the power to collect taxes is vested exclusively in the central government, so J&K will not even be a collector of taxes anymore. Now, since all money collected will go directly to Delhi, there will be hardly anything in the state’s treasury at any given time.

The GST regime is administered by the GST Council, which has two-thirds representation from the states and one-third states from the Centre. No state, including J&K, will have any special power in the council or veto. 

 

Economic loss

In India, 86 percent of trade and commerce is done in the informal sector, which accounts for 90 percent of the jobs. Only 10.1% of all jobs in India, according to a 2010 survey, are in the formal sector.

J&K has a workforce of 45.3 lakh and 41 percent of this is engaged in agriculture and allied sectors. Our unorganised sector accounts for over 86 percent of the commerce and 88 percent of the jobs. Moreover, business in J&K has been stressed for the past 27 years and we have not caught up with India’s high growth trajectory. 

Because J&K’s representative in the GST Council failed us, all our dry fruits will now be taxed -- cashew nuts at 5 percent and walnuts at 12 percent, for instance. Prior to GST, all dry fruits were tax exempt. Kashmir’s dry fruit trade was already stressed due to imports from California and China and GST may well be a death knell to it.

The handicrafts trade too was exempted from tax earlier but will now be taxed at 12 percent; papier mache will attract 18 percent tax. The capital cost of most of our handicrafts is just five percent, so GST will really be a blow. For example, a plain pashmina shawl costs just Rs 5000, but when a sozni artistan works on it for around two years, it becomes an exquisite piece of craft worth Rs one lakh. So, under GST, the tax will be levied on Rs 95,000, which is the labour cost. In short, it is the artisan’s hands that are taxed. This is a sin.

All hotels that charge over Rs 1,000 per night will be taxed. The majority of the hotels in the state come in this bracket. They were exempted earlier.

Our MSMEs cannot compete with similar enterprises outside the state because of the non-conducive atmosphere and lack of government support. With the imposition of GST, they are simply pitted against MSMEs elsewhere without any protection. We feel that a significant number of these entrepreneurs will shut down as they will not be able to compete. 

The resulting stress on the economy from all these changes will force many businesses to shut shop and cause retrenchment of labour.

We are given to understand that being a consumer state, we will gain Rs 3,000 crore in taxes. But at the same time, we are losing substantial amount of tax revenue. Earlier we used to collect our own service tax, which in the last financial year amounted to Rs 1,560 crore. We also earned Rs 731 crore in toll tax in the same year and Rs 300-400 crore from entry tax. All this money, and more, will now go to the central government. So what have we gained?

 

Administrative loss

Administratively, too, J&K has surrendered all powers to Delhi. As part of the GST regime, a centralised GSTN portal has been created that every trader and SSE has to access. Since everything is now done automatically online, the entire commercial taxes department has been reduced to just a building. 

The online system is a problem for traders in J&K, where the government frequently blocks internet citing “law and order”. In 2017 so far, internet services have been sapped 12 times. Filing returns on time will be a problem if internet is blocked so routinely.

Just five percent of all tax assesses, selected randomly by computer, shall be audited annually under GST. Of these, 90 percent of those traders or entrepreneurs with turnover of less than Rs 1.5 crore per year shall be audited by state authorities and the rest by central authority. Those with turnover of over Rs 1.5 crore shall be assessed by state and central agencies on a 50:50 basis. In a nutshell, the state has surrendered most of its administrative powers of auditing to the central government.

 

Safeguards, really?

The Mehbooba Mufti government claims to have ensured enough safeguards for J&K under the GST regime. Most importantly, they claim that Section 5 of the J&K constitution remains unchanged, meaning the state can make laws under it. That is misleading: the state can, of course, still make laws under Section 5, but not related to taxation. 

When you have, by legislation, given away all taxation powers to the central government, you clearly lose the authourity on those matters. The central government has anyway made it clear that the state can only make laws related to some additional taxes, like if wants to impose a new tax on agriculture or any other service. However, these taxes will have to mandatory be outside GST. The state cannot increase, reduce or modify any tax rate decided by the GST Council.

Is there any tax outside the ambit of the GST that the state can control? Practically none. GST covers nearly every service and over 12,000 commodities. If the state still finds something to additionally tax, it will be whipping the skin off our own people.

 

Inflation concern

The government has misled the consumers that GST will make goods. I believe most goods will become dearer in the coming months. The reason is that the unorganised sector was not taxed earlier but now they are if they have over Rs 1.5 crore turnover. Take this example: I used to get hardware items from Aligarh from unorganised sector manufacturers at fifty percent lower cost than I would have from the organised ones. Now all these people have been pitted against the branded sector in the same tax bracket and their costs will rise. 

In the coming years, I see the mechanised corporate sector taking over all trade. The demand-supply chain will get disturbed. Demand will be more than supply and in such a situation, the economy of scale will prevail. It is also possible that the corporates may reduce their prices initially and hike them when they get market monopoly. They will destroy the unorganised sector. This will be a capitalistic market. And it will likely cause inflation: prices will go up and not come down.

After Singapore imposed GST, inflation spiked and it became one of the costliest cities in the world. It has since pumped billions of dollars into the economy to counter hyperinflation.

 

Better Alternative

Was there an alternative to GST that the state could have chosen instead? 

For one, the government could have enacted the state’s own GST law, with provisions for safeguarding the interests of traders and entrepreneurs under critical circumstances. This could have safeguarded our own constitutional autonomy as well. This GST law could have been synchronised with the central GST law. But this, and many more steps, was not done because the PDP-BJP government was in undue haste to appease their masters in Delhi. 

As told to Ink Correspondent