Can GST create more jobs?

The much-awaited GST Bill was passed in Rajya Sabha and Lokha Sabha on Aug 3 and Aug 8, which marks the beginning of a single sales tax regime set to be introduced from April 2017 across India’s market of 1.3 billion people.

Businesses in the organised sector cheered the passage of the Bill as GST will facilitate better taxation procedures and aid growth in the long term. But the question, whether GST will create jobs for the economy as a consequence of increasing profits, begs to be answered.

“Around 160 countries have already adopted GST…but unemployment and inequality is still rampant in this world,” said Virjesh Upadhyay, Secretary, Bharatiya Mazdoor Sangh, the labour wing of the RSS. As a reply to the scepticism surrounding GST and labour, an auditor at a big-4 auditing firm said, “Since it is a single tax across the country, factories and industries will now have their units in their states without needing to use the concessions available in other states because of varying taxes. So, there is a chance for employment in a state to increase.”

Although GST will help businesses cut costs, its influence remains restricted in the absence of revisited labour and land acquisition laws. “Manufacturing in India is currently 15 percent cheaper than Europe but the cost difference is decreasing due to increasing labour wages and other costs,” says a study conducted by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and Roland Berger Strategy Consultants.

Even though small scale industries – mostly set up in government-supported industrial areas like the Ambattur industrial estate – are flourishing, they are not labour intensive. Even if GST lets small manufacturing businesses to grow, jobs in these industries will be lost to automation as the cost of borrowing to purchase machines is lower than the cost of employing skilled labour. Large scale manufacturing units have been running on automation for much longer and their need for labour will be lesser in the long-term, according to the Vice-President of a small-scale industrial association.

Included under the GST’s sway are many small companies which were earlier spared from taxation. They could sell their products cheap and compete with large businesses because of tax exemptions. GST might take away this advantage, and the resulting closure of small businesses may worsen the employment situation in India. The turnover threshold for GST payment is set at 10 lakh. The low threshold will catch the loss resulting from the low rate of GST with a wider and deeper tax net.

The government claims that GST can wipe away the unorganised sector, bring it under the eyes of the taxman, and stop corruption. As a result people might lose livelihoods, without an alternate avenue for earning. Whether the move from unorganised to organised sector is good or bad, even the experts are unable to decide – because India has a significant and strong unorganised sector. 78 percent of total employment in India exists in the bottom layers of the labour market, according to a report by Ajit Ghosh for International Labour Organisation.

Census of India report states that farmers and farm labourers comprise 50 percent of total employment in India. When Mohini Mohan Mishra, Bharatiya Kisan Sangh was asked about GST’s impact on farming, he said, “The businesses and the government will benefit, but the farmers will not. Indigenous processing units on which the burden will fall – milk producers, dairy farmers, industrial workers – the government should [protect] and put a barrier.”

If popular confidence in the GST Bill rings true, the improved business environment will generate employment opportunities, which will then urge people in rural areas to migrate to industrial centres in search of work. As a solution to deal with this migration from rural spheres, the ASSOCHAM study suggests that “rather than [being] an employer, the government should be a facilitator for private sector to absorb the rural workforce and promote skill development in rural areas”.

The big-4 auditing firms have reported that even large businesses are underprepared to face GST. Some of the small scale industry bodies express similar concerns and greater uncertainty.

Currently, two GST rates are being floated. Union finance ministry has proposed 18 percent. But the National Institute of Public Finance and Policy (NIPFP) suggests 26 percent.

GST will substitute and occupy the place of taxes like CENVAT, central sales tax, state sales tax, and octroi tax, both at the centre and the state levels. The Bill’s success will “depend on the rate which has not yet been decided. We will come to know the impact based on the rate. The rate will be decided by the GST council, which has the Union Finance Minister and state finance ministers on its panel. But the industries are looking optimistic. Start-ups may get exempted. All outcomes for the moment are hypothetical,” according to Prof K. Jothi Sivagnanam, HOD, Economics Department, University of Madras.


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