Pradeep Patil

Investor | Entrepreneur | XLRI Jamshedpur and COEP Pune Alum | Target of 50% CAGR ? | Nothing is a Buy/Sell Recommendation

[Pradeep Patil @StockFundas101]

Taxation Policy in Developing Countries: A New Approach

Current Situation

-Governments are loss-making enterprises aiming to limit deficit to a certain percentage of GDP
-Direct and indirect taxes form major revenue sources
-Challenge: incentivize citizens and businesses to pay taxes willingly, not out of fear of law

Issues with Current Indirect Tax Structure

-Considered regressive as it taxes poor and rich equally
-Differentiated taxation is followed to address the issue
-Goods taxed differently based on consumer demographics
E.g., GST on cars is 28% while on milk it's 5%

Current system not foolproof; easy to bypass in certain industries

Understanding Cost of Non-Compliance
Definition: Expenses incurred to evade taxes (e.g., bribes, fake invoices)

For unorganized players (e.g., small granite companies):
-Cost is low (3-4%) due to owner involvement in transactions
-Can handle cash directly, minimizing leakages

For organized players (e.g., large automobile manufacturers):
-Cost is high due to complex operations and risk of internal fraud
-Need for transparent books to maintain stock prices
-Difficulty in handling large cash transactions

Demand-Side Pressure to Evade Tax

Definition: Consumer preference for lower prices drives businesses to evade taxes

Example: In the granite industry, customers seek the lowest price

-Creates a domino effect:Some retailers evade tax to offer lower prices
-Other retailers forced to follow suit to remain competitive
-Retailers pressure factories to sell without GST bills
-Factories comply to survive in the market

Result: Market equilibrium where tax evasion becomes the norm

Case Study: Granite Industry (Unorganized Sector)
18% GST, mostly produced by small companies (revenue 5-15 Cr/year)

High demand-side pressure to avoid GST for competitive pricing

Unorganized market structure facilitates tax evasion
Methods of evasion:
-Selling without GST bills
-Using fake invoices for transportation
-Bribing officials if caught (0.5-1% additional cost)

Total cost of non-compliance (3-4%) much lower than GST rate (18%)

Contrast: Automobile Industry (Organized Sector)
-Large manufacturers with revenues in thousands of crores
-High cost of non-compliance prevents tax evasion
-Owners not involved in day-to-day transactions
-Need for transparent financial records

Customers pay full GST (up to 28%) on purchases

Proposed Solution
Tax based on producer, not consumer
-High rates for organized industry products (e.g., cars, ACs)
-Lower rates for unorganized industry products

-Set GST rate close to cost of non-compliance

Key Equation: Tax Rate ≤ Cost of non-compliance + Premium for convenience

-Suggested rate: 5-6% for unorganized industries
-Include small premium (1-2%) for benefits of complianceE.g., easier banking, better credit access, peace of mind
-Offer additional services for higher rates
-Example: Payment facilitation between suppliers and buyers

-Apply same rate to all players in an industry
-Creates level playing field for organized players in unorganized industries

-Utilize existing GST portal infrastructure

Leveraging GST Portal for Credit Security
Current scenario:
-B2B transactions often work on creditSuppliers allow buyers time to pay after delivery
-Enforcing payments is difficult, leading to defaults

Proposed improvement:Use GST portal to facilitate payments and ensure credit security

Process:
-Supplier generates invoice and uploads to GST portal
-Buyer accepts invoice on portal to claim input tax credit
-Acceptance serves as proof of delivery and quality
-If buyer defaults, supplier can raise dispute through portal
-Government verifies and takes action (e.g., block GST ID, freeze bank account)
-Integrate payment tracking with existing GST return filing system
-Develop dispute resolution mechanism within portal
-Establish clear timelines for payment and dispute resolution

Benefits:
-Reduced defaults and fraud
-Early detection of bad players in supply chain
-Increased credit flow in market resulting in more business
-Boost to overall business activity
-Increased trust in B2B transactions

Expected Outcomes
-Increased compliance and billing value in unorganized sectors
-Similar or increased tax revenue in medium termE.g., 5% of increased billing value ≈ 18% of previous lower billing value
-Formalization of grey economy, increasing official GDP
-Improved credit availability
-Better international ratings for India
-Easier access to loans from global institutions (World Bank, IMF)

Conclusion

Positive sum game for government and businesses

Partially addresses regressiveness of indirect taxes
Encourages industry growth and formalization

Creates a more sustainable and willful tax collection system

[Pradeep Patil @StockFundas101]

@itsTarH @10croreguy But you say many times in the meet,” Drop a mail, we will help you”

[Pradeep Patil @StockFundas101]

@alphaaffairsf2f Lack of a strong alternative is the thread they are hanging by Punit Bhai. A common dialogue of friends when they lose the argument on all facts,” But I don’t want the other person leading the country”. Such a paradox 140 cr people and we still can’t find one!

[Pradeep Patil @StockFundas101]

@xvi_harley You should first read “Why nations fail”.

[Pradeep Patil @StockFundas101]

“History will be kinder to me than the contemporary Media’

~ Dr Manmohan Singh

[Pradeep Patil @StockFundas101]

@SureshKBN https://t.co/BoWHdq4eR0

This is the location. If you prefer waking up to bird sound and surprising peacock dance from balcony, this is the place. Comes with servant room, parking, 110 SQ yards UDS and no noise pollution.
DM me if interested.

[Pradeep Patil @StockFundas101]

@SureshKBN If you are ok with stand alone apartment and Banjara Hills MLA colony location, you can’t find serene and quieter flat than my old house. I have just put it on sale as I moved to bigger house. 2465 SFT with servant room and 400 acre garrison greenery view from balcony and Hall.

[Pradeep Patil @StockFundas101]

@Tushar17Nasik @vbomkara Good you revealed. They can’t reveal as an advisory. 😁

[Pradeep Patil @StockFundas101]

@itsTarH A time where there is a possibility that you may stay alive forever!!!!

[Pradeep Patil @StockFundas101]

@alphaaffairsf2f Only verified users can message you? It’s not open to everyone?

[Pradeep Patil @StockFundas101]

@LearningEleven Exactly what I was thinking in the morning, last 2 days my PF is underperforming to smallcap index and not much gap left in valuation.

[Pradeep Patil @StockFundas101]

@LearningEleven Anything changing in Blue Jet sir? It’s showing price action? Is it cutting in to Neulands share or just a capex movement?

[Pradeep Patil @StockFundas101]

@alphaaffairsf2f Wisdom of crows is always correct apparently.

[Pradeep Patil @StockFundas101]

@alphaaffairsf2f Definitely it has to be a process and experience to get this kind of hit rate. But I am not going to get the answer so easily from you, a closely guarded secret 😀 For me its 40W EMA or support !!

[Pradeep Patil @StockFundas101]

@alphaaffairsf2f Technically what exactly you look for in price action. It seems like some specific kind of red candle?

[Pradeep Patil @StockFundas101]

@alphaaffairsf2f Educated Neta is the biggest oxymoron of our time.