ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Functional, but Incomplete

The goods and services tax is a work in progress that is far from complete.

One year into the introduction of the goods and services tax (GST) in India, the initial teething troubles seem to have eased. Some issues regarding classification of commodities into rate categories have been addressed, while difficulties with filing of returns too have been temporarily addressed. One of the significant achievements of the GST regime is the considerable increase in the number of taxpayers registered. While timely compliance in terms of filing of returns is limited to less than 70% of the taxpayers, given time, more than 90% may be filing returns.

That said, GST continues to be a work in progress for a number of reasons. First, there is a general agreement that there should be fewer rate categories in the regime, with some arguing for a single rate and others settling for two or three rates. With the finance minister alluding to the possibility of rationalisation of rates of tax depending on improvements in revenue productivity, it is clearly one front on which the GST regime is far from settled. Second, the format of returns is yet to stabilise: while the GST council seems keen on maintaining a mechanism for invoice matching in the design of the returns, once again the pronouncements on the matter suggest that a series of changes are on the anvil. Third, there are certain activities that remain beyond the scope of GST: crude petroleum, natural gas, petrol, diesel, aviation turbine fuel, electricity, alcoholic beverages, and certain real estate transactions. It is important to recognise these features before one attempts to explore the impact of GST on the economy and on revenues. While the introduction of GST was expected to have a significant positive impact on the economy as well as on revenues, the impact would be realised only gradually when the reform of GST is completed.

Turning to the economy, the signals are mixed, but it is still too early to assess the impact. It is difficult to disentangle the impact of demonetisation from that of GST. The decline in rate of growth of quarterly gross domestic product (GDP) has been reversed since the introduction of GST, but the levels are below those achieved in the period prior to demonetisation. There seems to be some recovery in capital formation as well. These indicators suggest that the economy is turning around.

So far, GST has not been revenue neutral, more so for the union government than for the state governments. The union has assured the states of 14% growth in revenues. Since the rate of growth of revenue of most states has been less than 14% in the last few years, the assurance ensures the delivery of ­adequate revenue to the states in the short run. For the union government, however, GST has not yet been revenue neutral. The revenue from the GST compensation cess is meant for compensating states for any loss of revenue, suggesting thereby that the revenue cannot be appropriated by the union for its expenditure needs. Further, the revenue booked under Integrated GST is partly attributable to the states, as when the importing dealer claims input tax credit. If these two factors are taken into account, the revenue accruing to the union government in the last 12 months does not match the revenues it received from indirect taxes in the 12 months preceding the introduction of GST. In other words, even with the careful calibration of the rates of tax attempted by the fitment committee, at least in terms of revenue performance, GST has not been revenue neutral.

One of the important effects expected from GST is formalisation of the economy. The design of GST, that is, a more comprehensive value added tax, is expected to provide incentives for a larger segment of the economy to choose to be in the formal sector. Formalisation of the economy can potentially take two forms: hitherto informal units choose to become part of the formal economy or, alternatively, demand catered to by the informal units is now catered to by formal units. The former would be less disruptive to the individuals in the economy than the latter. One of the key provisions that can make a difference here is the reverse charge mechanism. For supplies procured from unregistered suppliers, registered suppliers are expected to declare such suppliers and charge themselves the tax, and pay the same to the government before claiming credit. In other words, this provision transfers the compliance requirements on such transactions from the supplier to the buyer. It could either encourage suppliers to register or buyers to change their procurement systems to avoid the additional compliance burden. If the general cost of compliance with GST is perceived to be high, especially by small suppliers, this provision might in fact result in formalisation by elimination of the informal suppliers.

Any improvement in compliance under GST, in the form of the number of registered taxpayers and even the returns filed, without an increase in the revenue reported, reiterates the fact that GST is still a work in progress. The GST council must revisit this issue in the larger interest of the economy alongside exploring ways to reduce the cost of compliance.

Updated On : 9th Jul, 2018

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