Did Goods and Services Tax spur shift to formal economy?
The results so far show a mixed picture
The goods and services tax (GST), which was implemented in July 2017, was touted as a game changer that would see the formal economy grow faster.
Lower effective taxes, along with increased compliance, would accelerate formalization, and organized businesses would gain share and tax collections would surge.
Companies in sectors such as ceramic tiles and plywood, where the unorganized sector has a significant presence, continue to face challenges from informal trade, showed an analysis by brokerage firm Edelweiss Securities Ltd.
In fact, the initial months of GST saw a significant increase in unorganized trade. Removal of check-posts across many states and the simultaneous deferment of the e-way bill implementation may have led to unchecked transport of goods.
Another factor working against organized companies in these sectors could be the relatively low value of goods, leading to easier under-invoicing or even no-invoicing, said a tax expert, who did not want to be named.
That may also explain why companies selling high-value products, such as jewellery, saw demand shifting towards organized businesses in the GST era, he added.
It should be noted that demonetisation and other regulatory measures have also aided organized companies in the jewellery segment.
In the plastic products sector, since the source of raw material is now being tracked, tax evasion has declined, said the Edelweiss report dated 4 June. Besides, the aftermarket segment of the batteries industry has also benefited from this GST-led shift.
However, some industries, such as apparels and electrical equipment manufacturers, have not seen any material shift in demand.
As for revenues, GST collection declined to ₹94,016 crore in May from a record ₹1.03 trillion in April. This was, however, higher than the monthly average of ₹89,885 crore through 2017-18. The government has set a monthly target of ₹1 trillion. Now, with the e-way bill system in place, collections are expected to improve.
“Our interactions with dealers and distributors, industry bodies, transporters and unorganised manufacturers indicate that unorganised trade activity has reduced post e-way bill implementation. A few indicated that there was a visible change in attitude of trade channels towards compliance, as incentives to trade via informal channels have reduced considerably,” the report added.
But given the large size of the informal economy, even after other tax-evasion measures are implemented, a meaningful shift from the unorganized to the organized sectors may prove to be a long-drawn process.
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