India’s bold GST reform widens its tax base, but is it too soon to celebrate?

India's bold GST reform widens its tax base, but is it too soon to celebrate?
Written by admin

Five years after its launch, the simplified GST scheme has caused tax collections in India to soar to record levels.

Anand Purohit | moment | Getty Pictures

It’s been 5 years since India introduced the Goods and Services Tax, and as the government’s revenue collection is accelerating, some analysts say it may be too soon to celebrate.

India – fifth largest economy in the world with more $3 trillion in GDP – It has managed to double its tax base since the introduction of GST in July 2017.

While collections increase and compliance improves, analysts caution that this does not necessarily lead to economic growth.

GST collections grew from approximately 7.2 trillion rupees, or $90 billion, per year. 2017-2018 fiscal year IT 14.8 trillion rupees in the fiscal year ending March 2022government statistics.

While revenue collection from GST is higher in absolute terms, there are those who question whether the growth in collections will continue.

“GST cannot increase growth. On the contrary, growth increases GST collection. So future GST collection will depend on the growth performance of the Indian economy. If growth slows further, GST collection will be adversely affected,” New Delhi senior fellow-based think tank Observer Research Foundation Abhijit Mukhopadhyay told CNBC. in his statement.

“Somehow, a rule of thumb emerged that if monthly GST collection exceeds 1 trillion rupees, or $12 billion, then it is a success,” he said.

Among other things, increased inflation is likely to suppress demand and lead to lower collections, Mukhopadhyay said. “The rise in commodity and food prices contributed significantly to GST collection. If inflation continues to rise, it will ultimately have a reducing effect,” he said.

What did India’s GST achieve?

The goods and services tax enacted by Prime Minister Narendra Modi’s government included 17 local taxes such as excise duty, service tax and value added tax. and 13 other expenses.

Under the nationwide tax regime, these various taxes It was replaced by a four-rate structure, ranging from a 5% tax on essential goods to a top 28% tax on cars and luxury goods.

“The GST remains an important tax reform for independent India despite many implementation problems in its first five years,” Rajan Katoch, a former heavy industry secretary of India, told CNBC.

It not only strengthened coordination within the federal state, but also “improved tax mobility, curbed indirect tax evasion, and attracted more and more small taxpayers to the formal system,” Katoch said.

The introduction of the GST mechanism helped incorporate multiple indirect tax rates to provide a cleaner and predictable structure.

Radhika Rao

Senior economist and managing director, DBS Bank, Singapore

Impact on foreign investment, ‘black money’

Opinions differ as to whether GST makes India a more attractive investment destination or is effective in curbing “black money” – undeclared income on which no taxes are paid.

It has long been known that black money plays a role in India’s economic activities. Minister of Finance of India in 2012 published a “white paper” on black money, defined by the government as “any income not paid by the taxes levied by the government or public authorities”.

Former industry secretary Katoch claims that GST has had an impact on black money.

“Since [GST] resulted in the formalization of transactions that were previously informal in nature, yes, it would have led to a reduction in black or unrecognized cash flows,” he said, adding that it is difficult to estimate the extent of the reduction.

But not everyone agrees.

“Black money is generated in real estate, commerce and politics. In all three cases, cash transactions continue. Neither monetization nor tax reform has had much impact,” New Delhi-based economist Sanjaya Baru told CNBC.

Demonetization refers to the Modi government’s controversial move in 2016 to withdraw the ratings of higher denominations as legal tender. as a way to clean up black money.

The government had hoped that tax reforms would increase India’s attractiveness for foreign investors, but that may not have happened, according to Baru, a media adviser to former Prime Minister Manmohan Singh.

In theory, GST should make India more attractive to foreign investors, especially in the manufacturing sector,” he said. [foreign direct investment] It hasn’t been very impressive in production.”

GST cannot increase growth. On the contrary, growth increases GST collection. Hence, future GST collection will depend on the growth performance of the Indian economy.

Abhijit Mukhopadhyay

Senior Fellow, Observer Research Foundation, New Delhi.

India’s Ease of Doing Business ranking according to the World Bank has moved up to first place. 63rd place in 2020 from 100th place in 2017 – Jumped 37 steps in 3 years.

While not directly attributable to India’s tax reforms, paying taxes is one of about a dozen factors used to measure ease of doing business in the listed countries.

“The administration’s reform efforts have targeted all areas measured by Doing Business, with a focus on paying taxes, cross-border trade, and resolving insolvency.” The World Bank’s 2020 report said.

Political strife ahead

Rising inflation isn’t the only cloud on the horizon for the GST plan.

India is expected to make a politically dangerous decision in August on whether to bring oil, diesel and so-called “sin goods” such as liquor and tobacco under the federal tax, GST.

“Petro products should be included in the GST framework. This can significantly increase revenue and reduce inflation,” said Mukhopadhyay of the Observer Research Foundation.

However, this is an ambitious goal and could become a political challenge. Taxes on these goods are no longer In some cases, state governments led by political opponents and convincing them to give up this lucrative revenue stream will not be easy.

Separately, the federal government is facing other demands from state governments.

Since 2017, the federal government has been reimbursing state governments some of their tax revenues due to GST.

This ended on June 30, but states are now seeking an extension, citing two ‘missing’. Equity strategist with macroeconomics firm WealthMills securities in Mumbai Kranthi Bathini told CNBC.

For the Modi government, this demand could be the start of a long political struggle, even in states led by the ruling BJP or its political allies.

About the author


Leave a Comment