http://www.financialexpress.com/opinion ... hy/892564/
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The previous heading of this Financial Express 13-oct-2017, ahmedabad edition, page8 was
Few informal units get formal ; Most die"
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Pls see epaper at
http://epaper.financialexpress.com/1392 ... 7#page/8/1
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I have print copy with me !!
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Now the heading of the article on website is --- "Demonetisation, GST largely seen as positive development; here is why" !!!
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Few policies focus on what causes informality and so most ignore the cost of trying to make the economy more formal.
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By: Renu Kohli , 13-oct-2017
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Demonetisation, GST Glimpses of all of above can be observed in the almost one year after demonetisation and more recently, the GST reform.
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The move to formalise the Indian economy through demonetisation and goods and services tax (GST) system is largely viewed as a positive development. This is because an efficient and productive formal sector is perceived as the main driver of growth. Formalisation is understood happening through two shifts—informal to formal as unregulated firms enter mainstream, and market share expansion of formal firms as some informal businesses exit. These structural processes are accepted as given—no one really questions formalisation may not accelerate as anticipated. However, the cross-country evidence on reducing informality through explicit efforts is quite discouraging! Then too, scant policy attention has focused on what the costs of shrinking informality might be, if any offsetting measures are required to combat adverse income-employment effects.
Scepticism and caution is urged on both counts: Expectations of formalisation and related growth benefits need tempering, while prudence is needed for recognising the additional costs imposed upon a segment that is already extremely inefficient segment and could tip over the edge without support.
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Formalisation accompanies development, rising incomes
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Two important insights are drawn from collated findings of La Porta and Shleifer (henceforth LPS) who consider the critical question of how the informal economy shrinks (“Informality and Development”, Journal of Economic Perspectives, 28-3, 2014). In sum, LPS conclude the informal sector rarely, if ever, transits to formal. The formal sector is essentially demand-driven, i.e. consumers’ preferences for high-quality, higher-priced products. Formalisation of an economy accompanies the level of development as the informal sector gradually dies out with rising per capita incomes.
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Now, this need not fully apply to India, but may do so in parts. Five critical facts about the informal economy that LPS distil from numerous studies and two decades of World Bank Enterprise Surveys imply this might be so.
Critical features of informality: Not tax evasion, but poor human capital quality
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1. Informal economy is huge in developing countries—a typical 30–40% share in total economic activity and high employment shares amongst the poorest countries in a 185-country sample; this share falls to 15-20% in the richest quartile countries. India is above the median share—455 of GVA originates from the unorganised sector.
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2. Informal firms are small, unproductive, stagnant—but the main reason is not size, but human capital. For India, 89% of formal firms were headed by college-educated managers against none in informal ones as per Enterprise Survey data! Given a chance, many informal entrepreneurs would happily shut their businesses and work as formal sector employees, pay income tax. But few have this opportunity. The median productivity difference between informal and formal firms is 15%; for India, it is 18%. Similarly sized informal firms added just 21% of the value per employee of formal ones. Low productivity reflects very low quality products sold at low prices to low-income customers.
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3. Regulation is not what keeps them down—lack of access to finance is the biggest obstacle; informal entrepreneurs lack skills, business and accounting systems that banks value. Land is another, partly because of illegal occupation and fear of eviction. Regulation, taxes are distant concerns, way below corruption, electricity, licence-permits and crime. Informal firms consider the biggest benefit of registering is financial access!
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4. Informal firms rarely become formal—almost never. They start out and die in informality. They are not ‘reservoirs of entrepreneurial energy’ but ‘swamps of backwardness” (LPS). But they allow their owners to survive. Majority of registered firms started off as registered. A small percentage of informal firms, 14%, sell their output to formal firms (Enterprise Survey).
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5. As countries develop, informality becomes less important—the informal economy, captured by the degree of self-employment shrinks as per capita income rises. It is intuitive seeing the association between consumer incomes and demand for better quality, higher priced goods produced by the modern, organised sector.
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Policy focus fiscal, overlooks lack of managerial skills, formalisation costs
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The above basic facts suffice to inform that framing concerns about informal activities entirely in terms of negative consequences for competitiveness and growth and fiscal losses from undeclared economic activity is one-sided. Both demand and supply matter: low incomes and low demand for modern goods and services; job opportunities relative to the supply of unskilled labour force, education and managerial skills of entrepreneurs, etc.
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It is for governments to work out what matters how much, especially before structural policies are drafted to hasten formalisation to spur productivity and growth. Joining the formal sector significantly raises costs for informal firms—far more than they can recoup from raising volumes and prices given market constraints or which they can’t dream of lowering with their existing managerial skills, inputs, etc.
GST timing compounds informal sector’s burden, costs
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Glimpses of all of above can be observed in the almost one year after demonetisation and more recently, the GST reform. Scattered reports abound about small business closures and failures, import substitution, rising default rates of small finance banks, rising unemployment, farmers’ unrests, and much more. The inability to adapt is variously manifest in either strong resistance or pleas for fiscal support, e.g., reversion to cash from digital transactions (costs, computer knowledge and access, etc.), online compliance aversion under GST by textile, construction, transport, trade and other segments marked by large informality (lack of managerial, IT skills, accounting systems, additional costs threatening viability, loss of business from formal buyers, etc).
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There is likely much more that remains hidden or uncovered and unknown. In December 2016, we speculated if demonetisation’s debilitating impact could open fault lines for a (goo.gl/sqnS8N) structural slowdown, arguing for a quick survey to assess damages to the informal economy. Much water has flown under the bridge since. But now, the institution of GST reform so closely after demonetisation, the facts and evidence on why the informal sector is what it is and how it shrinks, the surfacing responses juxtaposed with India’s own structural characteristics call for focusing upon the constraints on transition to formality that are more to do with supply side factors than mere evasion of taxes and regulation. As LPS note, recognising that informal firms are extremely inefficient, extreme caution with policies that impose on them any kind of additional costs is recommended.
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Where’s the backup?
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It is overlooked that most other GST countries had much smaller informal sectors, e.g., 10-12% in Malaysia and lower informal employment shares, e.g., 33% in China as per ILO against India’s 82%. The focus upon formalisation not only misses supply-side constraints to transition but also fails to incorporate safety nets for those who could be casualties in the process.
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We can only finish with LPS who find evidence is consistent that informality declines, although slowly, with development. Therefore, structural policies designed to promote formality should be introduced with caution; their wisdom depends in part, whether they encourage formalisation, or discourage informal activity. They are sceptical of all policies that might tax or regulate informal firms; rather than encourage them to become formal, these could instead drive them out of business, leading to poverty and destitution of informal workers and entrepreneurs—despite all their benefits of avoiding taxes and regulations, they simply cannot compete with formal firms. Growth that kills the informal sector is driven by the formation and expansion of formal firms managed by educated entrepreneurs.
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Taking into account the subsistence dimension of informality in India suggests a combination of following outcomes: fierce resistance to formalisation for preserving livelihoods, which would only thwart formalisation; or substantial income and employment losses surfacing as a drop in aggregate demand. Possibly, a mix of both. Perhaps expectations of accelerated formalisation need moderation, especially in the light of steadily decelerating growth. The prism of viewing the informal sector as merely unproductive and tax-evading needs broadening too with greater attention to the bottleneck—the supply of educated entrepreneurs who can run productive businesses—and mitigating the costs.
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My opinion -------- Due to GST, a large number of small / medium traders and manufacturers will simply die. Only a few will be able to cope survive and not for long. So their business will pass to large firms !! So on-book economy will grow but total will shrink. The organized firms will expand and hire youth and dying firms create huge unemployment in age over 40 years --- but they have no FB or energy to make their voice heard. Most of the business will shift to foreign firms. Thats because very few Indian firms has campital to expand or even survive
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---------------FinExp editorial ------------
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13-oct-2017
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http://www.financialexpress.com/opinion ... ia/892576/
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GST compliance at a low; here is why this is very worrying for India
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While it is early days, and companies are still grappling with the GST, the relatively low number of returns filed for July is disappointing.
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Of the approximately 60 lakh assessees who were supposed to file GSTR1 (sales) returns by October 10, only 46 lakh have done so.
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Even after accounting for some 2 lakh incomplete filings, as also those who would opt for the composition scheme or are B2C players, the gap would appear to be fairly high at close to 10 lakh assessees. Equally perplexing was the relatively high number of assessees who claimed their tax liability was nil in the returns filed by August 20. Of the 56 lakh summary returns that were filed, 40% or 22 lakh assessees claimed they were not eligible to pay any tax at all. Conceding this was a very big chunk of assessees, the government has decided to launch a survey to figure out whether this is genuine. There will be no searches or seizures; instead, the government hopes to get some information through consultations with taxpayers and other sources. Prima facie, it seems highly unlikely such a large number of firms attract no tax liability. Either way, it is important to get to the bottom of this to get a sense of whether the tax base is actually expanding. Given 26 lakh new taxpayers have come into the tax net, the GST collections should have seen much greater buoyancy. Possibly, the system will stabilise over the next few months and this will lead to a bigger mop-up in subsequent months. As of now, though, the mobilisation is subdued and there has been a shortfall in both July and August. Unless all glitches are ironed out in the next few months, the government could be staring at a shortfall in indirect tax collections vis-a-vis the budget estimate of `9.27 lakh crore for FY18.
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While teething troubles were always to be expected in the case of GST, what is surprising is that even after demonetisation and the Operation Clean Money initiative, there doesn’t seem to be any exceptional buoyancy in direct tax collections either. Direct tax collections have risen 15.8% y-o-y in H1FY18 versus 8% in H1FY17 and 12.2% in H1FY16.
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But, if you keep in mind that the full FY18 budget growth target was 15.3%, the growth in H1 looks less impressive, more so when you consider the numbers put out on the suspicious deposits being tracked. A total of 18 lakh persons who made cash deposits that did not match their income profiles was talked of by the taxman at one point; another figure put the amount of suspicious deposits at `2.8 lakh crore, though it was always clear all of this was not black money. Investigations of this nature take their time, and it is possible the data mining by the tax authorities will give them enough information to collect taxes from tax-evaders. But, till then, it does look as if we could be staring at large tax shortages at the end of the year. With shortages in other revenues such as those in telecom, and the growth slowdown likely to lower nominal GDP, the deficit will almost certainly take a hit.
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My take ---- many firms had to take GST registeration as their past years' revenue was above threshholds such as 20 lakhs, 75 lakhs etc. But now they are not even filing returns. And there are lakhs of them --- 14 lakhs out of 60 lakhs i.e. almost 18% to 20% !!! Some may file returns late. But many will simply end the business. So their business will get taken over by large firms. But total will shrink, though on-book GDP will rise.
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