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Fiscal stimulus through the GST system.

Date: 09-04-2020
Subject: Fiscal stimulus through the GST system
By Pradip P Shah

These are extraordinarily difficult times for all—individuals, and businesses. The government has announced a Rs 1.7 lakh crore stimulus which, excluding pre-committed expenditure on direct benefit transfers to farmers and MGNREGA, indicated an additional expenditure of about Rs 1 lakh crore, or less than 0.5% of GDP.

To avoid the risk of structural damage to the economy, it is desirable to have a stronger stimulus rather than a modest one to help stressed businesses, and individuals, tide over the current economic situation, and progress toward recovery. Germany has proposed a package of 10% of GDP, as has USA; Britain has proposed 15% of GDP, Australia 9.7%, and Denmark 13%.

There are 1.2 crore GST payers in the country. The tax-GDP ratio of the country (after including the Centre and states’ tax revenue) was 17-17.5% till FY19. It is estimated that indirect taxes, which hurt the poor more and are therefore regressive, account for 65% of the country’s overall tax revenue, while direct taxes (corporate tax and income tax) account for only about 35% of the tax revenues. A quick, impactful, and equitable way to stimulate the economy is through the indirect tax system.

Even before the coronavirus pandemic arrived in India, the problem the country was facing was paucity of demand. The government should reduce GST rates from 28% to 18% on cement/bricks/tiles and automobiles, and from 18% to 12% for hotels, along with allowing input tax credit on fuel. The 5% GST on under-construction residences should be scrapped, or input tax credit given for such activity. The reduction in GST incidence can help improve demand and, thereby, in the revival of large job-creators like construction, automotive, tourism, and logistics businesses.

In addition, the government should implement with urgency a package of measures amounting to about 5% of GDP (as estimated for 2021 by the budget) to provide targeted liquidity support for businesses in a systems-driven, administratively-easy, and fair and equitable way that returns the amount of stimulus back to the government in two years. Following are suggestions for this:

GST clawback loans: All entities that have paid GST can opt-in and accept, through the same GST system they use for filing returns, an offer from the government for a temporary loan (which would be an unsecured senior loan, with full prepayment rights for the borrower, other standard, fair terms and conditions being spelt out, and to be accepted by the business on the net) in the amount of the last six-months’ (September 2019 – February 2020) GST monthly payments. This would be done by giving credit into those companies’ accounts, to be paid back with 12% annual interest in two equal annual instalments starting at the end of the first year one. (Only those businesses will avail of it which cannot get cheaper loans from other sources.)

GST revival loans: All GST payers, unless they opt-out, would be entitled to retain as a temporary loan from the government (similar in terms as the GST clawback loans) the next nine GST monthly payments, to be paid back with interest at 12% per annum in nine corresponding instalments, starting two years later. (The process of filing returns would continue, but the returns tweaked to allow businesses to retain as loan the GST payable to the government—everything can be system-driven.)

Defer GST April instalment: The government should extend the due date for payment of the GST collections of March 2020, payable by April 24, 2020, by three months.

Government to immediately release payments: Government agencies/departments should immediately release all certified bills due to vendors within the next 10 days.

RBI to buy government paper: To enable the central government to provide the fiscal stimulus outlined above, RBI should be prepared to buy government bonds of three years’ maturity. The US Fed is purchasing unlimited amounts of treasuries, the European Central Bank recently announced a €750bn bond-buying scheme. To bring down expectations of interest rates, the government should announce its intention to lower the EPF interest rate by 1% (from the unconscionable 8.65% last year) along the lines it has recently done for small savings.

The GST loans, if taken by 70% of GST-registered businesses, would result in extending the fiscal deficit, but this amount would come back to the government in two years’ time. To further protect society from the inflationary effect of the fiscal stimulus, especially on food items, the government must be ready with supply-side measures of the kind it initiated in its first year. The unsecured loans thus delivered, fast, and without form-filling and bank approval processes, being unsecured, will leave security cover for businesses to borrow from banks, and facilitate recovery of the businesses.

In addition to this fiscal stimulus, the central government should ease the onerous burden of compliance deadlines—boiler inspection, boiler licence, company law filings, etc—by directing state governments, and the central ministries to extend deadlines this year by at least three months as businesses need to concentrate on survival and revival, instead of scrambling for onerous compliances, all of which have intimidating punishments.

There will still be some individuals left out—those without Jan Dhan accounts, or Aadhaar cards, and small businesses that are not GST-registered, but which also need financial support for revival and recovery. The direct benefit transfers already initiated by the government as support for vulnerable households, and the GST loans and adjustments can help alleviate, to some extent, the inevitable economic distress.

Source:- financialexpress.com

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