Home > News > India > India is still halfway from realizing GST’s full potential
Former president Pranab Mukherjee and Prime Minister Narendra Modi launching GST on the midnight of 1 July 2017 at a special ceremony in Parliament.  (PTI)
Former president Pranab Mukherjee and Prime Minister Narendra Modi launching GST on the midnight of 1 July 2017 at a special ceremony in Parliament. (PTI)

India is still halfway from realizing GST’s full potential

  • It is too early to judge GST by the trends in economic growth or revenue collection so far
  • What is bothering policymakers is the shortfall in GST collections. This is putting pressure on policymakers to raise GST rates

A typical long-haul commercial truck used to cover about 225km a day on average prior to July 2017 and spend a fifth of its run time at inter-state border check posts. After these check posts were dismantled in July 2017, when India replaced 17 central and state taxes with a goods and services tax (GST), the logistics industry emerged as a clear winner. Logistics cost, which used to account for about 14% of the value of goods sold in the country, came down to 10-12% while the distance covered in a day improved from about 225km to 300-325km, according to an analysis by the roads ministry.

Another winner from the tax reform rolled out after about 17 years of planning and negotiations, is the consumer. Several rounds of tax rate cuts made sure taxes on goods, including on items such as washing machines, televisions, cameras and a host of household items, became cheaper and retail inflation stayed under control. Though taxes on goods have come down from the pre-GST era, only a few services such as restaurants and under-construction properties have benefited from rate reductions.

For businesses and traders, the reform brought down the number of forms to be filed by businesses to just 12 from 495 earlier. Yet, rolling out the biggest tax reform since independence was not a smooth affair. According to Abhishek Jain, tax partner at EY, absence of a ‘tax on tax’ effect and uniformity of law across states are benefits that GST has brought to businesses. The tax reform brought most of the indirect taxes into the domain of a federal body, the GST Council, out of the exclusive domains of central and state governments.

Anticipating the sea change in taxation, the way of reporting and the uncertainties involved, businesses slowed down production in the weeks before GST roll-out. This is believed to have caused the sharp slowdown in gross domestic product (GDP) growth to 6% in the June quarter of FY18, compared to a 7% expansion in the fourth quarter of FY17 ending March 2017. Growth recovered in subsequent quarters with policymakers suspending some of the toughest provisions such as invoice-matching and extending deadlines for filing returns, in addition to handholding businesses and traders to navigate the new system. By the last quarter of FY18, growth had recovered to 8.1%, though after that the economy started cooling off. This trend continues with growth slowing down to 4.5% in the second quarter of FY20, its slowest pace since March 2013.

The deepening economic slowdown is testing the assumptions behind GST. One of them, based on the experience in some other economies, is that GST could spur the economic growth rate by 1-2 percentage points. An efficient and distortion-free tax system was expected to support economic growth. Experts say that it is too early to judge GST by the trends in economic growth or revenue collection so far.

“There is no doubt that consumers and businesses have benefited from GST but in a large country with diverse state economies, it will take about five years to realize the full potential of GST. We are halfway towards that goal. Now we should allow GST to settle and only incremental changes should be made. Overall, GST reform has helped businesses," said M.S. Mani, tax partner at Deloitte India.

What is bothering policymakers is the shortfall in GST collections, which is affecting the Narendra Modi administration’s ability to pay states the promised compensation for their revenue losses. This is putting pressure on policymakers to raise GST rates. “GST being a tax on transactions, there is a direct correlation between revenue collection and the growth rate. If growth falters, revenue cannot grow," said Mani.

Though petroleum, electricity and real estate, other than under construction properties, are out of GST, the indirect tax system has become more unified across states. This makes doing business easier. GST could be further simplified, but it is a simpler regime than the earlier fragmented indirect tax system. Removal of internal trade barriers and tax efficiency are expected to bring dividends to the economy in due course. The shift to a technology-oriented tax is also expected to help the authorities to widen the tax base further. Inclusion of currently excluded sectors, clarity on issues like intra-company services between two offices and an option for voluntary payment of GST dues with waiver of interest and penalty should make this reform even more successful, said Jain.

Subscribe to newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaper Livemint.com is now on Telegram. Join Livemint channel in your Telegram and stay updated

Close
×
My Reads Logout