GST rate has a role in auto sector slowdown

Have you ever noticed a honey bee land on a flower? It hovers over it and then ever so gently it sits there, splurging the pollen all over its tiny haired legs and then takes off in no time to spread the pollen to germinate the plants all over elsewhere.

Now, consider a giant black bumblebee, with its strong wings flapping so fast that it can remain suspended in space without moving for whole seconds.

Then if it lands on a flower, the plant tumbles under its weight. When again taking off, it gives a thump down. Old wiseintelligent man, Chanakya, is known to have observed that the king should gather taxes like a honey bee: tax should be collected without the producer of wealth feeling its weight. And then, it should be so deft that the wealth creator could keep on generating more.

GST, which was launched as a measure for winning economic freedom for the country, has turned out to be otherwise. In times of crisis, it is showing such a system could be like an iron scaffolding limiting all agile movements required for adjustment. It has a cumbersome structure for introducing any such changes and that rules out any quick fine tuning altogether.

When a falling demand is biting in, there is widespread concern about lack of purchasing power at the hands of the consumers, the common sense approach would be to marginally lower the tax rates.

In the days of central excise and sales duties, the centre could have lowered the excise to give a nudge to turnover. The other day, certain biscuit manufacturers said that 18% GST on biscuits was hurting and their biscuits stocks are piling up.

Small little packs of the cheapest biscuits, often munched by the humblest of workers when suddenly feeling hungry, might be deterred to do so when money flowing into their pockets slows down. A tiny downward tax take might be helpful in these days.

But to do so would be to convene the whole GST Council and deliberate and hear voices of dissonance. Maybe, there could other ways of achieving the same results, but it is not certain.

Similarly, for automobiles. As it is a highly organised industry with a high-power association of auto-makers which is deft at conveying its distress to the general public, every alternate day we have stories about automobile sales going down or some voluntary stop to manufacturing.

At times, a couple of days’ suspension of production is not a bad thing to happen to overall performance, as some of those who had run such automobile plants confirm.

It helps to restore overall economics of operation, costs and efficiency. The plight of the automobile sector is not the issue but the numerous tiny and small units, spread all over the country, and their un-articulated suffering as suppliers and manufacturers of sundry items that is the most critical matter. For the auto sector, there could still be some easy steps.

One simple solution could have been a downward revision of the GST on cars. But again, the union government cannot on its own introduce any such changes. Besides, at the GST Council different states can have different interests on such a proposal.

A producing state might want a drastic cut in GST to help push cars and maintain employment in the state, while a consuming state might not be as interested as it will only incur revenue losses.

The earlier system of states deciding on their own sales tax rates and other local duties, while the centre deciding on the basic excise duty, had allowed for accommodating a variety of interests.

A simple unified nationwide tax structure had removed all cobwebs to impose a single straightjacket solution. But cobwebs are flexible and can be brushed aside to suit your needs; reinforced structures are not.

The cerebral appeal of such a clean and clear nationwide tax system is great. No wonder, the GST system was vehemently pushed forward and the principle was nurtured and elaborated by a string of egg-heads.

They looked for clarity and intellectual sophistication, in place of an amorphous jelly. It was a similar kind of appeal for having a completely planned economy in place of a confusion of a market place.

Admittedly, GST has its advantages and already bestowed many improvements. Trucking companies said life has become easy, trucks could now make many more fruitful trips than get bogged down at state borders.

But then, you could now do much better with a fewer trucks than previously. Demand for additional trucks would be necessarily fewer. Maybe, trucks sales would marginally go down unless level of activity jumps substantially.

But does an iron frame of a unified tax system ipso facto encourage greater activity. Going by current evidence, it does not. Of course, there is ground for arguing that there are many more reasons for the current slowdown than introduction of the GST network.

True. But what the GST system inherently carries is a foisted trend towards inclusiveness. That is, because of the chain mail effect, every player would insist on the downstream operator to become part of the network.

It has been stated earlier as well when the GST system was being introduced. The problem is those who have been used to not paying any taxes, or work in the confines of informal sector, were unwilling to immediately get formalised. Psychology has a play here.

Some of the tiny and small units, which were suppliers to the big organised units, have been pointing out, not even as a complaint, their difficulties in the new system.

The bigger players are asserting pressure to bring down their prices as they remain outside the chain. But it is not always possible for them to adjust to that.

The medium and organised players will take time to adjust to the new GST structure and the current situation of an apparent slow down is the outward symptom of this process of adjustment of the numerous small and tiny units. This can accompany with loss of employment as well, in some cases.

It seems, it is the bumblebee effect of the GST system, in place of a honey bee landing, that is one of the factors for the spread of a feel-ill factor in the Indian economy (as opposed to a feel-good factor). What is to be done: the Government should now encourage the latter with a smiling face.

Anjan Roy is a freelance journalist. Views are personal.

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