While many of the government’s lofty goals will take time to achieve, the transition to a unifying goods and services tax (GST) has witnessed inevitable shocks
New Delhi: On 1 July, the government made an ambitious shift to what it promised was a modern, transparent and technology-driven indirect tax system to sharpen the competitive edge of a $2.3 trillion Indian economy riven by internal trade barriers and a raft of central, state and local taxes.
The goods and services tax (GST) was hailed as the biggest tax reform by India in 70 years of independence, a potential game-changer that would, at one stroke, unite the country of 1.3 billion people into a common market by dismantling inter-state tariff barriers.
GST subsumed 17 central, state and local taxes in line with the “one nation, one market, one tax" concept on which it was based. The new regime had tax slabs for goods and services—5%, 12%, 18% and 28%.
A little less than 100 days since it kicked in, the new system is yet to settle down. While many of the lofty and intangible goals set by the government will take time to achieve, the transition has witnessed inevitable shocks.
Businesses slowed production ahead of the rollout of GST to minimize tax complications while shifting to the new system. This in part led to economic growth in the April-June quarter decelerating to 5.7%, the slowest pace in three years, from 6.1% in the preceding three months.
Businesses and traders also struggled to measure up in the first two monthly tax-filing cycles, making headlines about inadequate preparedness for the massive tax reform.
Going by the experience of other countries that adopted GST, some economists had predicted that the tax reform would boost India’s economic growth rate by up to two percentage points in due course as it eliminates inefficiencies in the tax system.
Under GST, tax is levied only on the amount of value added at each stage in the supply chain. Businesses get a rebate for the taxes paid on raw materials and services used, which will make them more competitive as it eliminates “tax on tax".
However, the production slowdown in the run-up to the implementation of the tax reform in July has had an adverse impact on supplies.
“The disruption caused by implementation of GST was confined to the informal sector of the economy and it has largely bottomed out in July. Its effect will now taper off," said Rajiv Kumar, vice-chairman of NITI Aayog, the federal policy think tank.
The disruption caused by implementation of GST was confined to the informal sector of the economy and it has largely bottomed out in July. Its effect will now taper off- Rajiv Kumar, vice chairman of NITI Aayog
Kumar endorsed the Asian Development Bank (ADB)’s economic growth forecast for India. ADB, which follows a calendar year, on 27 September revised its 2017 growth forecast for India to 7% from its July estimate of 7.4%, reflecting “short-term disruptions" such as last year’s demonetization and the GST rollout that it expected to “dissipate".
Some of the impact on the economy on account of destocking of goods prior to GST implementation has already started easing, said D.K. Joshi, chief economist at credit rating agency Crisil Ltd.
Scale of reform
“In sectors such as logistics, the benefit of GST is immediately visible in terms of efficiency, while a boost to the economic growth rate that GST is expected to fetch is a medium-term goal," said Joshi.
What brings uncertainty about how soon businesses and the information technology (IT) systems supporting GST could settle down is the unprecedented nature and scale of the tax reform that threw up unexpected challenges to policymakers and to the IT infrastructure.