GST AND ITS IMPLICATION

ON INFORMAL SECTOR
By shashwat Rai, Ravi Bhushan, Utkarsh Srivastav, Vedant Oza, Rishabh Todi
 Introduction on history of GST

GST or Goods and services Tax came into use from July1,2017 replacing number of other taxes that was
applied till June 30,2018. The discussions of GST bills have been in process for more than two decades
and the bill was passed to implement GST from July 1,2017 by the prime minister of India Mr. Narendra
Modi and his finance minister Mr. Arun Jaitley. GST launched on the midnight of July 1 ,2017. The
single GST replaced several taxes and levies which included: Central exercise duty, service tax additional
customs duty, surcharges, state level value added tax (VAT). The informal sector plays a vital role in the
economic development of all countries. Particularly, developing countries one-third of national income comes from
this informal sector only. The informal sector reduces unemployment. The entrepreneurs are in this sector for their
livelihood, not for making more profit. Some informal entrepreneurs are earning more than the formal employees in
our country, like vegetable vendors, agents, brokers, foot-path traders etc. Majority of the entrepreneurs are
community-based in this sector. In India, each community has their own business. Rural, urban and city side also
community-based entrepreneurs are more. For example, foot wears and beauty parlor etc. The informal sector
develops the Indian economy invisibly. Most of the rural and urban people are continuing their family business,
because of the lack of employment opportunity, In India, most of the family businesses are in the informal sector.
The earned income from this sector has utilized for the purpose of their children education, family commitments,
personal savings, etc. So the government should take necessary steps to convert this sector into formal.

Overview on history of GST.

2006: First announcement of GST was made by the Union minister during the 2006-2007 budget, that it
would be introduced on April 1,2010.
2009: Empowered committee released the first discussion paper.
2011: 115 Amendment Bill was introduced and subsequently lapsed.
2014: 122 Amendment Bill was introduced in Lok Sabha.
Sept 2016: The first GST Council Meeting was conducted.
March 2017: CGST, IGST, SGST, UTGST and Compensation cess act was recommend by the GST
Council.
April 2017: CGST, SGST, IGST, UTGST and Compensation cess act were passed.
1 July 2017: GST laws, Goods and Services tax was launched all over India.
7 July,2017: Jammu and Kashmir state legislature passed its GST.
 What were the taxes available before the implementation of GST?

State value added tax (VAT), central excise tax, service tax, central sales tax are all replaced by the
single entity called as GST( Goods and Services tax). Value added tax was mainly for the taxes at state
level across all states in India. On introduction of GST , VAT is replaced by SGST and the state will be
converted into SGST department. The Central excise tax is the Central tax for the goods and services are
now replaced by CGST.

What was the GST rates as on July 1, 2017?

GST was implemented in the year 2017 on July 1. When GST was first introduced, the charges were
broadly divided for the SGST and CGST. When compared to the earlier taxing system, newly introduced
GST rates were higher. When GST was first introduced it had five tax slabs and the goods and services
were spread across these tax slabs. This GST rates were followed till an amendment to lower the GST
rates on selected goods and services were made on 18 January 2018 at the 25 GST Council meet. After
which amendments were made on 29 goods and 53 services which came to effect from 25th January 2018.
GST rates major good still 25th January 2018 are:
0% GST rate: fresh meat, fresh chicken, bangles, newspapers, milk and curd.
5% GST rate: cream, coal, medicines, coffee, tea, spices.
12% GST rate: butter, cheese, umbrella, ghee, cell phones.
18% GST rate: pasta, corn flakes, envelops, camera, speakers, monitors.
28% GST rate: chewing gum, ATM, hair shampoo, sunscreen, dye, pan masala, deodorants.

What are the revised GST rates that was effective from Jan25,2018?
With the introduction of GST in July 2017, the tax rates on most of the basic commodities also remained
high. But on the 25 GST Council meet it was proposed to reduce the GST rates on selected goods and
services. Based on this, GST rates were revised on January 18, 2018 and the revised GST rates for both
Central and state came into effect on January 25,2018. The rate was revised on 29 goods and 53 services.
GST rates were revised from 28% to 18%, 28% to 12%, 18% to 12%, 18% to 5% and few were charged
nil GST and for very few products there was raise in GST rates.
Goods taxed at 0%: vibhuti, parts used for manufacturing hearing aids .
Reduced from 28% to 18%: public transport buses that run on biofuel.
Reduced from 28% to 12%: for old and used motors vehicles (other than medium and large cars and
SUV’s) with a condition that No ITC is availed.
Reduced from 18% to 12%: sugar boiled confectionery, drinking water, bio diesel , sprinklers.
Reduced from 18% to 5%: tamarind kernel powder, log supplied to house hold domestic consumers.
Reduced from 12% to 5%: articles of straw, velvet fabric.
Reduced from 3% to 0.25%: diamonds and precious stones.
Rate increased 0% to 5%: rice bran
Rate increased 12% to 18%: cigarette filter rods.

What are the benefits of introduction of GST.

With the introduction of GST there are various benefits globally. The main motive is to maintain a
uniform tax and develop the country and its products and introduce it globally.

Some benefits are:

1. GST create common markets nationally.
2. Attracts foreign investment.
3. Helps to have uniform taxation.
4. Small retailers have nil tax or low tax.
5. Helps improve production and encourage to enter international market.

What are the features of GST.

GST implementation has brought a major change in economy of India. It has widen up the markets of the
goods and services due to uniformity of taxation throughout the country.

Some features are:

1. GST is applied on the supply of goods unlike the earlier form of taxation.
2. GST is destination based structure of taxing.
3. It is charged as CGST , SGST and IGST.
Informal Economy

The informal sector constitutes the largest portion of the economy in terms of value addition, savings, investments etc. The share of
the formal sector is around 10 -15 % in the income of our nation ,on the other hand informal sector is more than 25-30 %. 1n United
States, corporate share business is nearly 65-70%

The informal forms of organizations are major players in such activities as manufacturing, construction, transport, trade, hotels and
restaurants, and business and personal services. The informal sector plays a significant role in the economy in terms of employment
opportunities and poverty alleviation. This sector generates income-earning opportunities for a large number of people. In India, a
large section of the total workforce is still in the informal sector, which contributes a sizeable portion of the country's net domestic
product.

While analyzing the composition of the Indian Economy, it is of two major sectors namely, organized and unorganized. The organized
sector contributes two third to the GDP. Whereas the remaining 1/3 is by unorganized sector. The following statistics by National
Account Statistics reveals the contribution of the unorganized sector to the NDP.

Definition by NSO

"Enterprises typically operating on a small scale with a low level of organization, low and uncertain wages, and no social welfare and
security."

Importance of Informal Sector in Indian Economy

About 0.4 Billion workers constituting around 90-95% of the total workforce were employed in a country in the unorganized sector as
per NSS Survey 1999-2000. It plays a vital role in terms of providing employment opportunity to a large segment of the working force
in the country and contributes to the national product significantly. The contribution of the unorganized sector to the net domestic
product and its share in the total NDP at current prices has been over 55-60%. For savings, the household sector share in the total
gross domestic saving mainly unorganized sector is about 3/4th.

Features of the Informal sector

● Low level of organization, small scale usually employing fewer than ten workers and often are from the immediate family.
● Heterogeneity in activities.
● Easier entry and exit than in the formal sector.
● Minimum capital investment, little or no division between labour and capital.
● Mostly labor-intensive work which requiring low-level skills.
● There is usually no formal training as workers learn on the job.
● Employer and employee relationship is often unwritten and informal with little or no rights.
● Due to invisibility, workers in the informal sector are often largely unaware of their rights, cannot organize them further.

The informal sector contribution

The contribution of the unorganized sector in net Domestic Product is around 60% in 2002-03. Thus, the major chunk of NDP is
provided by the unorganized sector.

Sector Share in Net Domestic Product (2002-03)

 Source: NAS 2005

Further, the sectorial composition in the NDP can be appreciated by the appended figures.

Industry-wise distribution of NDP in organized and unorganized sectors shows that in the agriculture sector, the share of organized
sector is 4-5% whereas the unorganized sector contributes 95% share . By this reason, the informal activities are studied in the non-
agricultural sectors only. In mining, manufacturing sector 65% share in NDP is of the organized sector while 35% share is contributed
by the unorganized sector. In the service sector contribution of organized sector is 53% while 47% of the share is contributed by the
unorganized sector.

Main Industries of Informal Activities

Sector-wise distribution of different industries (2002-03)

Industry Organized sector Unorganized sector Total

(% of NDP) (% of NDP)

Agriculture, forestry, fishing 4.1 95.9 100.0

Mining, manufacturing, electricity, and 60.5 39.5 100.0

construction

Services 53.1 46.9 100.0

Total 43.3 56.7 100.0

Source: NAS 2005

Status of non-agricultural informal enterprises

Only 12% of the enterprises in the rural areas are registered with any registration agency whereas in urban areas this percentage is a
little higher at 31%.

Status of registration with any act/authority Percentage of enterprises by location

Rural Urban Combined

1. Registered 11.6 31.3 20.2

2. Unregistered 88.4 68.7 79.8

Total 100.0 100.0 100.0

 Source: NSS 55th round report on non-agricultural enterprises in the informal sector in India, 1999-2000.

Consequences of GST on Informal Sector In

Indian Economy

➢ Pre-GST Implications
The informal sector of the Indian economy being non unified had enjoyed a many benefits of
their life before GST (Goods and service tax) had come to existence. The scenario was pretty
much very different from what it is prevailing today.
The benefits that these non-unified players enjoyed is described as follows
● No Regulation to govern their working
Neither the government nor the Tax Dept. had initially exercised any action to govern the
working of the informal sector in India. There were no regulatory to regulate rules and regulation
to intervene into the wrongful practices of the informal sector in India.
So, the lack of interest and the insubstantiality of work force in the Government lead to the
working of the informal sector under the darkness or shadow and thus enjoying life without
having the worry to pay the fees of any kind such license to operate, regulatory fees etc.

● No taxation
The informal sector being non-unified and vast gave them the opportunity to be off guarded from
the taxes in country and allowed to work freely and continue hoarding liquid currency without
any tax on the mind. There vast network made it difficult for the government to reach out to each
one of them thus helping them enjoy tax free life.

● No banking culture
There was no banking culture evident in the informal sector in India before GST, as vendors of
this sector would often Rebuke from the paper work required in the bank and the possible threat
of being exposed to the income tax department for all their undisclosed assets they hoarded over
the years. This lead to a heavy dependency of vendors on high interest loans offered by landlords
and other informal source of money lending in the country.

● Medium of exchange
This sector was mainly dependent on hard currency or liquid or cash as its main medium of
exchange. So, whatever products a customer purchased he/she had to pay the amount in cash as
the vendors had no other means payment available to them. Surprisingly, they did have other
methods of payments as well, but were reluctant to use as they would have to raise their tax
invoice and thus would be compelled to pay taxes which would create agitation in their
livelihood.

● Operations
The informal sector works at low level of operations to keep themselves under the table from the
eyes of the government. There non-unified structure helps them to operate in more number of
regions and not being under any kind of tax lenses. Thus having a low key presence makes them
less vulnerable to any kind penalty that may be imposed on them if caught for their unauthorised
presence in the economy.

Therefore, all the above mentioned scenarios were the benefits that were enjoyed by the informal
sector before the implementation of GST, but before we jump to any conclusion of this topic we
may now discuss the implication on this sector post GST and how GST lead to a partial
transition of these sector to more of a formal one.

➢ Post-GST Implications
Before GST came into existence, a typical setup in India had to apply for service tax number and
a value added tax (VAT) number. Now Depending upon the product and the market, some
businesses had to additionally apply and acquire excise number, customs number, and more.
Such approval had government fees ranging from about Rs. 1,500 to Rs. 5,000, depending on the
tax number applied for. As tax filing could not be done online therefore, many processes had to
be completed physically which in turn was time consuming and costly in nature. A general
practice adopted by many enterprises was to hire tax practitioners(CA’s) or lawyers for
registering their business. However, these professionals came with their own set of packages
which included their service fees along with the government fees and it proved to be exorbitant
for the enterprises who employed their services and thus pushed the compliance cost to anywhere
between Rs. 5,000 to Rs. 10,000.

● Post GST Loot

In order to bring the transitional cost down, the government waived off the GST number
application fees, this, though simplified the process, and moved it online to enable transparency
and comfort for the consumer, but still the market for tax practitioners(CA’s) prospered. These
Professionals helped many enterprises to obtain GST numbers by charging them anywhere
between Rs 1,500 and Rs 10,000.

Now the average cost of obtaining a GST number was around Rs. 2,000 – Rs. 2500.
Thus, many of these professionals looted or fooled the small enterprises for their lack of
knowledge on the subject and extracted an exorbitant sum of fees for just getting a GST number.
However, this was not the same case with large and well-Off businesses.

● Increase In Tax Returns And Compliance Costs

GST led to a 200% increase in the compliance cost for small and medium-scale businesses.
businesses suffered from the one-time transition cost and lacked the required infrastructure such
printer and the software required for GST—which made GST compliance challenging, time-
consuming, and costly venture.

Apart from the above incurred costs, the businesses also faced challenges due to a permanent
increase in tax-compliance cost. This is because over more than 80% of the businesses used
professional help in filing taxes and Since the uploading of each invoice, which therefore now
has to be done regularly, a requirement of an accountant had to be catered, which the small
enterprises in the informal sector may not be able to afford.

The number of filings has also increased from around 5% to a minimum of 37% per annum for
each registration, considering the following GST types such as GSTR-1, GSTR-2, and GSTR-3
as three separate returns. This increase in frequency thus led to an increase in the fees charged by
the tax professionals because these professional now have to devote more time to filing tax. This
in turn decreased their capacity to serve the same number of clients as they were doing in an era
of pre-GST, thus inflating their service charges, which thereby impacts the tax compliance costs
of many informal setups.

● Transition from an informal working culture to more of formal one

As per the data collected by we found that,

In India, the National Commission for Enterprises in the Unorganized Sector (NCEUS)
defines the unorganized informal sector as “all unincorporated private enterprises
owned by individuals or households engaged in the sale and production of goods and
services operated on a proprietary or partnership basis and with less than ten total
workers.”

Informal sector in India contributes more than 30% to the GDP which is a good proportion that is
being credited, but most of these firms are largely non-compliant with regulatory norms, and
evade tax and this lead to a shortfall in the government’s revenues for any further development.
After GST took birth and was further implemented in the informal sector by the government to
curb the revenue deficits incurred due to above mentioned reason, many enterprises in this sector
had to comply with the framework of this particular tax system otherwise they would rather not
be left with any option but to shut down their businesses.
Ironically, not many setups found themselves transitioning from informal to formal.
For example, businesses that sold to end customer continued to enjoy the life they were enjoying
during pre-GST era.
About a handful proportion (around 15-20%) found its way to more formal structure due to their
product base as well as their end relationship.

● Inadequate infrastructure
Since inception, GST’s website is either constantly crashing or running slow. Most of the
respondents have complained about the slow, constantly crashing, time-consuming, and non-user
friendly GST website. The constant crashing of the website has caused businesses to spend more
than usual time on the website to file their tax returns. During the peak hours or last days of the
tax return, the website crashes frequently.

● Frequent changes in the tax slab

Ever since its implementation, there has been many changes in tax rates on many products across
country. Although this helped the government in bring down the prices of daily essential goods,
it in turn hampered the businesses selling such products.

There have been occasions when tax rates were revamped overnight which led to massive losses
to many vendors in the morning as sudden decrement in the taxes (say 25-18%) made businesses
skeptical of maintaining inventory.
Tax saving method opted by Informal Sector
Before GST: -
The taxation in informal sector is quite different. Different areas define
their own different informal sector and then those are brought in the
lights.

The existing literature on informal sector taxation can be divided into

two main strands. The first, and larger body of work, focusses on the
rationale for taxing those in the informal sector, with the main
motivations including revenue collection, equity, efficiency, and
governance considerations.

The second strand in the literature analyses the general approaches that
can be used to tax those in the informal sector.
We know that India is a developing country. In developing countries, the
taxation of informal sector is majorly attributed toward Gross Domestic
Product (GDP).

In terms of equity, taxing those in the informal sector would alleviate

concerns among formal sector taxpayers who view the non-payment of
taxes by those with similar incomes in the informal sector as unfair.
From an efficiency perspective, it is argued that informal firms, in
attempts to avoid the attention of tax authorities, may engage in behavior
that leads to lower output.

After GST:-
When the GST was applied, then intension has been clearly identified to
bring Informal Sector under the ambit of Formal Sector.
Some call it as Formalizing the Informal or End of Informal Sector.

Small business in India is defined, on the basis of investment in plant

and machinery, as either micro, small or medium enterprises. These,
collectively called the MSME sector, form the backbone of the Indian
economy.

GST’s impact on the MSME sector is tri-pronged. The first involves a

substantial reduction in the turnover based exemption threshold.
Turnover exemption under Indian indirect taxation, be it excise, service
tax or VAT, even GST, is generally two tiered. The bottom tier are those
enterprises completely exempted from taxation and compliance while
the upper is partially exempted by a reduction in the rate of taxation and
level of compliance. This partial exemption could be generally applied
to all eligible assesses or only to particular categories of assesses.

Tax Evasion Pre and Post GST

GST is a major reform that includes a lot of pieces. GST has subsumed different taxes like VAT,
Service Tax, Excise Duty etc. This has not only helped in simplifying the taxation system in
India due to the removal of multiple taxes but has also removed the cases of double taxation
wherein first excise duty were being levied and then VAT was being levied on the same item.
The other benefit of GST is, it has introduced the concept of INVOICE MATCHING, which
ensures that there are no revenue leakages and the businesses deposit the rightful tax with the
government.

Before GST
To understand the benefits of GST let’s first have a look at what was wrong with the previous
taxation system. In the previous taxation system, let us assume that a certain Mr A has availed
services worth Rs. 10 Thousand from Mr B. Service Tax @ 15% i.e. Rs. 1.5 was required to be
paid by Mr A to Mr B, post which Mr B was required to deposit this Rs. 1.5 Thousand with the
Government. As a result, Mr A was able to take the benefit of Input Tax Credit worth Rs. 1.5
Thousand.

However, for whatever reason, Mr B didn’t deposit this amount of Service Tax with the
Government – either fully or in part. Let us assume, that in his Service Tax return, he mentions
that he has paid Service Tax of Rs. 50,000 to Mr C and Service Tax of Rs. 50,000 to Mr D and
claims the benefit of input tax credit of such amount paid. The balance Rs. 50,000 was deposited
with the Government. In reality, however, the amount paid to Mr C was an actual claim whereas
the amount paid to Mr D was a fake claim.

Since, in the service tax return, the invoice wise detail was not required to be mentioned and only
the consolidated details were required to be mentioned in most of the cases, the government was
not able to track this. Adding to that, sending a service tax notice to everyone was not possible,
notices were being sent only to a small number of people and the rest of the taxpayers were able
to avoid depositing service tax with the government. This system was widely prevalent,
especially among small businesses who neither used to receive any service tax notice nor were
they liable to do a Service Tax Audit.
After GST

In GST Taxation system, details of all invoices are required to be mentioned in the GST Return.
The main reason why invoice wise details are required is that by doing so, the government will
be able to track, whether proper taxes have been paid and as a result, ensure that the benefit of
input tax credit has not been misused.

Considering the above example, if Mr A avails services worth Rs. 10 Thousands from Mr B,
GST @ 18% i.e. Rs. 1,80,000 would be liable to be paid to Mr B. Mr B would be required to
deposit this with the Government.

In the previous taxation system, Mr B used to make false claims and take the benefit of Input
Tax Credit for payments made to Mr D & Mr C. However, as the service tax return was a
consolidated return, it was difficult to track such false claims. Moreover, in the GST system,
invoice wise details are required to be mentioned. In the GST system, these invoices would be
matched with the GST Returns of Mr D & Mr C, so as to ensure that these are actual claims and
not fake claims.

In the GST system, these transactions would be checked in detail at the GST portal. The GST
Return of Mr B would be matched with the GST Return of Mr D and Mr C so as to ensure that
the tax has actually been paid. If there are any false claims, the GST portal will not pass on the
benefit of Input Tax Credit. Thus, until Mr D does not deposit the GST collected from Mr B, the
benefit of Input Tax Credit would not be allowed to Mr B.
As a result of this, the government’s tax collection would increase as the business would not be
able to fake claims and evade taxes.

To ensure that the system of invoice matching works perfectly, the government has mandated
that all invoice wise details are to be mentioned in the GST Returns. This will certainly increase
the compliance burden for the businesses but will help the government ensure that proper taxes
are being paid and that there are no revenue leakages.
Conclusion

The informal sector provides an opportunity to both educated and uneducated people in all the areas in developing
countries. This is not a solution for economic crisis or recession. All the people need some basic income to run their
family and to manage their children's education. The government should take much care about this sector because
the contribution of this sector is more than the formal sector.

Formal Informal

*It is formed by Management. *It is not formed by management and is a part

of formal organization.

*Leadership is defined. *Leader is elected.

*Communicatin is no free there are different *Communication is free.

modes of communication like scalar chain.

*This is not temporary and is for a longer *It can be desolved anytime and is not
period. permanent.

*There are certain rules and regulations *There are no certain rules and regulations to
which are to be followed. be followed.