Goods and Services Tax: Matching Level-Playing Field of Small with Big

GST has expanded the base of the organized sector, has motivated small businesses to join the organized system, increased transparency, and arrested the exploitation of any stakeholders in the business process. — Alok Singh

Goods and Services Tax (GST) is a designed taxation tool having many characteristics like simplicity, integration of multiple taxes, whole country as a single market, checking tax avoidance or tax theft, and most importantly it is a tool which has offered an opportunity of level playing field to small players who compete with big players.

A big player can forward integrate as well as backward integrate their supply chain practices. When a company is forward integrating it is moving its planned product nearer to the end user customer on its own system and hence control over the whole forward supply chain. When a company is backward integrating itself then it is attempting to control the supply of raw materials, and other ancillary parts needed to produce the planned product. For example, if we consider a company which is manufacturing potato chips then the meaning of extreme case of backward integration is that the company owns the potato, to own the potato company owns the logistics network including trucks, the company also owns the cold storage facilities which are nearer to the potato farmers, the company also engages itself with a legally bound farming contract with the farmers, or can even lease the farmland for a lengthier time from the land owners. The forward integration in this case means that the company owns the logistics facility to transport the packaged potato chips to the market, it also has a warehouse near the market, it also has exclusive wholesale and exclusive retail outlets for its potato chips and it is as nearer to the customer as possible by any other potato chips manufacturer. In this scenario, the company has everything available in-house, and hence the tax paid by the company is also in its knowledge. Moreover, the company can trace its backward as well as forward supply chain and keep on improving its operational efficiency and hence consistently increasing aggregate profit margin.

A small player who makes potato chips is dependent on another small player who supplies potatoes and another small player who transports the chips to the market, and another small shop seller who sells the potato chips. There can be a huge chain of small players in the small potato chips business starting from farmland to the end user customer. In the absence of a GST system, the small player’s cost of production will be higher and hence market share will be smaller. Such players won’t see the light of sustainability easily and struggle throughout their life for survival. The older system was such that these small players won’t pay tax and also won’t get access to the facilities for matching the production cost with those of big integrated players. It means that the tax avoidance by the small players is at the price of higher production cost, lesser market share, and hence reduced profit margins. One failure can kick the small player out of the business. The GST has provided an opportunity of leveling the playing field for small players with those of the big players.

The cascading effect of the older system of state and central taxes impacted adversely small businesses. The input tax credit mechanism in GST provides an opportunity for small businesses to match the cost of production with those of big integrated businesses. Earlier the big integrated businesses could get the raw materials, logistics support, market access, and other operations in-house while the small businesses relied on external agencies for the same raw materials, logistics support, market access, and other operations. This resulted in higher production, operations, and logistics costs for small businesses in comparison to big integrated businesses. This forced the small businesses to bypass the organized mechanism for making profits and such businesses dealt mostly with hard currency for their survival.  That small business that attained a sustainable level of success might also rely on the hard currency transaction mechanism to make a profit. Still, such intentional exclusion from the organized business had a huge tradeoff of efficiency, productivity, agility, and many more. Once a small business survives, it aspires to sustainability and then aims to maximize profit by expanding its market reach. Such businesses were the culprit of tax theft and the GST regime has forced such businesses to fall in line. 

Along with GST, the union government has come up with incentives for small organized businesses to migrate to organized business. The production linked incentive (PLI), the tax holiday period, the handholding in terms of many other assurances and actions like regulating e-commerce, providing open network digital commerce (ONDC), and obviously GST mechanism is a huge relief to the small businesses in matching the cost of production with that of the big integrated companies. Moreover, the cost of debt for small businesses in the organized sector is cheaper than those in the unorganized sector. There is no motivation left for small businesses to continue in the unorganized sector or informal category as the transparency, accountability, and facilities provided to small businesses are huge in an organized category. The GST is a triggering point to convert the unorganized category of business to an organized category.

Small businesses can come up together, create clusters for their products and services and form a cooperative for their businesses. These are possible only if all the small businesses of a particular product or service join the organized sector.

Petroleum products are outside the purview of GST and petroleum products impact the logistics and transportation cost in a huge way. The inclusion of petroleum products in GST will be further helpful to small businesses. The real estate business is mainly unorganized and there are many small contractors of big cities and big contractors of small cities who are comfortable doing business in the unorganized sector. Real estate is in a grey area of GST as there are many ifs and buts about GST in the real estate sector. The government should develop a simple GST mechanism for the real estate sector which is understandable and interpretable by the real estate buyers, developers, and the real estate project supply chain members. 

GST has expanded the base of the organized sector, has motivated small businesses to join the organized system, increased transparency, and arrested the exploitation of any stakeholders in the business process.          

(Alok Singh is a Fellow of the Indian Institute of Management Indore, a freelancer academician, and associated with AGET Business School, Jhajjar.)

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