In a few hours, we will have the post-election Union budget for fiscal year 2019-20. Finance minister Nirmala Sitharaman had called for crowd-sourcing of suggestions on top of the advice rendered at meetings convened by the NITI Aayog and the finance ministry. There is even a Penguin book collectively authored by many people. Coping with the flood must have been a problem in itself, adding to the time pressure under which the whole process had to be gone through.

Fortunately, all advice seems to converge on a single recommendation, to wit that the principal objective at the present juncture should be to set employment-generating private investment on a rising trajectory. That frontal need, however, conflicts with a whole set of other equally desperate needs, and cannot be addressed by the finance ministry alone. Manufacturing, thermal power generation, urban housing, all need assured sources of water. Scarcity of water has reached proportions that would make all but the most foolhardy investor stagger back. The water problem in Chennai is the stuff of international headlines. At present, these needs are met by trucking in water mined from rural areas, but it is only a question of time before those sources become ever deeper and costly to access. Unless there is a nationally coordinated water mission, which reduces the cultivation of thirsty crops such as paddy and sugarcane, or switches paddy cultivation to less water-intensive methods like the system of rice intensification, releasing a larger residual amount of water for other activities, no investment will happen. The Karnataka state government is considering a ban on further construction of urban housing in the city of Bengaluru, because of the strain on the city’s water supply system.

That is a wise decision from multiple points of view. There is a large stock of unsold houses in the country, estimated by one source at 1.28 million units, in a country where the unmet need for housing is estimated at 10 million units. The need is at the affordable end, the unsold stock is across the entire spectrum, but until housing developers manage to recover their investment, further lending to the sector will suffer from contagion. Then there was the impact of the distortionary goods and services tax (GST) rate structure (my Raja Chelliah Memorial Lecture, March 2019), which levied purchases at the under-construction stage but not on completed housing, hitting working capital availability to the housing sector badly. This has been the pattern even after the levy was shifted in February 2019 from an input credit system to a composition basis. Under-construction housing is now levied at 5%, with an affordable carve-out at 1%, but completed housing is not. The reason for this lopsided levy pattern was a bid to stamp out unaccounted-for wealth as a source of working capital for the housing sector.

In the event, as we know so well, non-banking financial companies (NBFCs) stepped in, financed by short-term capital raised mostly from mutual funds. Today, NBFCs are teetering on the brink of bankruptcy. The key component of the “purchase before completion" financing model which made it work so well, was prior commitment on the part of buyers. The new schemes financed by NBFCs seem not to have assessed market demand. The key error lay in loading onto GST the burden of stamping out unaccounted-for wealth, without any thought to the replacement source of working capital for the housing sector.

In the face of unsold inventory and near-bankrupt NBFCs, investment in housing cannot be expected to take off. The need of the hour is for the urban development ministry to identify the factors, whether transportation or some others, which can make the unsold stock saleable. The housing regulator, the National Housing Bank, should actually require consumer commitment at the start of housing projects, tantamount to a formal recognition of the key role of the buyer in the earlier financing model. Most of all, GST levies need to be evened out between under-construction and completed housing. The burden of blocking the use of unaccounted-for wealth cannot be placed on GST.

About GST itself, there seems to be a gnome within it working against simplification, which is one of the necessary conditions for inspiring business confidence and the willingness to invest. At the latest meeting of the GST Council on 20 June, new GST forms with submission requirements unfamiliar to taxpayers were introduced. Form GSTR 1 will be replaced by GST ANX-1 from October 2019 (luckily submission frequency unchanged), where the new form has a hanging provision for invoice uploading, which can be continually added to. Two months later, in December 2019, the summary form GSTR 3B, familiar and accepted by taxpayers, will be phased out in favour of GST RET-01 for large taxpayers, and small taxpayers will have to submit both that ( GST RET-01)(quarterly) and GST PMT-08 (monthly). All this is clearly driven by a bid to return to invoice matching. That pincer approach to tax evasion will fail in its revenue purpose if compliance complications serve as entry barriers to investment, especially at the small end. Why could we not have stayed with the old forms for a few more years while we try to induce investment in small business in a tax regime that is stable and well understood? GST revenue is not doing so badly. The fault lies with budgeted targets that have been far too ambitious.

Indira Rajaraman is an economist.

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