New Delhi: India’s indirect taxpayer base has increased by more than 50% with the implementation of the goods and services tax (GST), the formal sector is bigger than currently estimated and the country’s internal trade is around 60% of gross domestic product (GDP), the Economic Survey for 2017-18 said, basing its findings on data and trends from GST.
The Economic Survey is the first to be presented after India rolled out GST last July.
More than 10 million taxpayers have registered under GST, as against 6.5 million registered under the old tax regime, but after discounting for multiple counting. With the tax registration, return filing and tax payment process completely online under GST, policymakers have a new database to look for trends about firms and consumers.
Further, the direct taxpayer base has increased by around 1.8 million due to demonetization and GST, the Survey said.
The Survey estimates the size of the formal sector—firms either offering a social security net or registered under GST—is 13% of total firms in the private non-farm sector but accounts for 93% of total turnover.
The Survey estimates that only 0.6% of the firms can be categorized as hard core formal sector—those that are registered under GST and provide a social security net to employees. These firms, however, account for 38% of total turnover, 87% of exports, and 63% of the GST liability. On the other hand, 87% of firms, representing 21% of total turnover, are purely informal, outside both the tax and social security nets, the survey said. Around 12% of firms, accounting for 41% of turnover, 13% of exports, and 37% of tax liabilities are in the tax net but not the social security net.
It points out that the formal sector, especially formal, non-farm payroll firms, is substantially greater than currently believed.
“Formality defined in terms of social security provision yields an estimate of formal sector payroll of about 31% of the non-agricultural work force; formality defined in terms of being part of the GST net suggests a formal sector payroll share of 53%," the Survey said.
N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, said GST is a powerful tool to increase the size of the formal sector. “GST should increase tax buoyancy both on direct and indirect tax side. However, we should be careful while drawing conclusions from this preliminary data as we are yet to complete one full year of GST," he said.
The Survey notes that the distribution of the GST base among states is closely linked to the size of their economies, allaying fears of major producing states such as Gujarat, Maharashtra and Tamil Nadu that the shift to GST will undermine their tax base.
State-wise share of the GST base shows Maharashtra has the highest share of taxpayer base at 16%, followed by Tamil Nadu at 10%, Karnataka at 9%, Uttar Pradesh at 7% and Gujarat at 6%.
Also, a profile of the new filers shows the bulk of transactions—nearly two-third—are business-to-business transactions and exports, and only 17% are business-to-consumer transactions
Further, voluntary compliance has seen a surge with about 1.7 million registrants who were below the threshold limit and, hence, not required to register registering under GST. With state-wise export classification now possible, the Survey says new data on global exports of states suggests a strong correlation between export performance and states’ standard of living.