IMPACT OF GST ON UNORGANIZED BUSINESS SECTOR COMPLIANCE COSTS AND COPING STRATEGIES

Abstract [English]

The introduction of the Goods and Services Tax (GST) as a transformational reform measure in the field of India’s indirect taxes in 2017 signifies a complete overhauling of the existing indirect tax system by way of moving towards harmonization of taxes and greater efficiency. The impact of the reform among firms has proved extremely contentious, with large, organized firms clearly benefiting, but there is an open debate as to its impact on informal firms. How GST affects millions of small businesses, India’s biggest work base, and a key albatross around the economy’s neck This study deals with the impact the goods and services tax (GST) has had on some 65-million-plus micro and small enterprises, which collectively provide the livelihood to more than 80% of the Indian workforce and account for nearly 50% of the output of the nation. Drawing from secondary sources and 40 semi-structured interviews with entrepreneurs in Uttar Pradesh, Maharashtra, and Tamil Nadu in a mixed-method approach, the paper explores two sides of the coin of compliance costs and survival strategies.
The results suggest that the costs of compliance, in terms of finances, administration, and attitudes, are relatively higher and have a regressive edge on 3–6 percent of turnover for the informal business sector. At the same time, the report also spotlights industry resiliency. Coproduction entrepreneurs use coping strategies such as collective resource pooling, (meta-)intermediaries, strategic non-registration, and selective digitalization. These adaptive mechanisms write down that GST has not killed off informality but transformed it, resulting in what academic analysts have termed “bounded formalization.”
The paper finds the possibility of GST as an instrument of progressive formalization, and the design structure of the current GST worsens inequalities in the business ecosystem. Policy re-engineering, through accommodating compliance architecture, simplified refund mechanisms, supported digitalization, and sustained capacity-building, is essential to ensure that GST promotes inclusive growth, not exclusion.