July 6, 2017 / 2:33 PM / a month ago

GST makes 'untouchables' of small firms, hurts informal workers

A man walks past a banner during a protest by traders against the implementation of the Goods and Services Tax (GST), in the old quarter of Delhi, June 30, 2017.Adnan Abidi

MUMBAI (Thomson Reuters Foundation) - India's biggest ever tax reform excludes tens of thousands of small businesses and millions of workers, risking an increase in unemployment and social unrest, analysts say.

The goods and services tax, the biggest tax reform in the 70 years since independence, replaces more than a dozen federal and state levies.

Officials say it will bring millions of businesses into the tax net, boosting government revenues.

But critics say the tax is too complex and the cost of compliance too high.

The new tax requires firms to upload their invoices to a portal that will match them with those of their suppliers or vendors. Companies that do not register for a tax number risk losing customers.

"Smaller, unregistered companies are being treated as untouchables," said Vinod Shetty, a rights lawyer in Mumbai.

"Not all companies can afford to register and invest in compliance. As a result, you will see small businesses shutting down and laying off workers."

India's informal sector employs an estimated nine out of 10 workers. It makes up about half the textile industry and 70 percent of footwear and jewellery manufacturers.

Any firm with an annual turnover of more than 2 million rupees ($31,000) has to register for the goods and services tax, which will require an overhaul of the firm's accounting systems and an investment in technology.

For small companies operating on wafer-thin margins, this is an expensive proposition.

"The entire system only favours registered companies. Even firms not required to register will suffer, as other firms may not want to do business with them," Shetty said.

"It is really targeting a class of business owners who are not very wealthy and are likely religious minorities or of lower caste, who now stand to lose their livelihoods."

According to the government, the new tax makes doing business easier, and companies will gain substantial savings. Expanding the tax base will bolster public finances and boost welfare spending, officials say.

For businesses, the benefits outweigh any initial costs and hiccups, said an industry representative.

"Small businesses face an existential question: Comply and thrive, or not comply and die," said Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small and Medium Enterprises lobbying group.

"Inevitably, a few firms will lose out."

The informal sector employs about 400 million workers and generates more than half India's gross domestic product.

Those losing their jobs may have a hard time finding employment, as too few jobs are being created despite an expanding economy.

Only about 200,000 jobs were created in eight of India's most labour-intensive sectors in the last two years - a fifth of the jobs created in the previous two-year period, data showed.

Meanwhile, the government has diluted its goal of training 500 million people in new skills by 2022.

"Imagine that millions of workers laid off because of GST (goods and services tax) end up on the street with no jobs," Shetty said.

"It will lead to an increase in social unrest unless the government makes GST more inclusive."

($1 = 64.7794 Indian rupees)

Reporting by Rina Chandran @rinachandran, editing by Alisa Tang. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, women's rights, trafficking, property rights, climate change and resilience. Visit news.trust.org to see more stories.

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