GST | Narendra Modi: GST may not be the best in class, but it is far better than the earlier system

Growth fell in the first year of GST’s implementation. From 7.1% in 2016-17, GDP growth rate fell to 6.7% in 2017-18.
A ‘good and simple tax’ is how Prime Minister Narendra Modi described the goods and services tax (GST). Finance minister Arun Jaitley went one better in his speech when launching it at a specially convened midnight session of Parliament on June 30, 2017: “There will be a check on inflation, tax avoidance will be difficult, rates will be lower compared to earlier, the country’s GDP will benefit, and the extra resources the states and the Centre will get will be used to serve the poor.”

In theory, GST was win-win. It subsumed 17 taxes and 23 cesses, ending the cascading of taxes (paying tax on tax) that reduced efficiency and pushed up prices. But none of its proclaimed benefits was expected to flow overnight. Indeed, given the compromises inevitable in pushing through such a landmark reform—especially its ramifications for sub-national tax autonomy in a federal democracy—the benefits could only be expected by and by. Even so, one year down the line, where are we vis-a-vis GST’s promised benefits?

But first, a couple of caveats. To begin with, it is impossible to establish a one-to-one relationship between a tax and macro-economic fundamentals like inflation or GDP that are influenced by a host of domestic and global factors.

Second, the GST we have today is a patchwork, stitched together by the compulsions of fiscal federalism. It is very much a work-in-progress, and is likely to remain so for some more years before we get to the desired goal of a simpler, more broad-based tax structure. Third, the full impact of the change is likely to be felt over a much longer term.

So, how has GST delivered on the promised benefits? Take inflation. Have prices come down? Yes and no. While prices of many goods, especially essentials, have come down post-GST, services are more expensive.

However, given the relatively lower weight of services in the consumer price index (CPI), inflation has declined in July 2017-April 2018 relative to the comparable period last year. Though the actual impact will vary across households depending on the share of services in their consumption baskets—since services have a lower share in consumption baskets at lower income levels— GST can be regarded as broadly beneficial on the price front.

Improved Tax Compliance
Has tax avoidance decreased? It’s early days yet, but there is reason to believe that, at the very least, tax avoidance has become more difficult. According to the finance ministry, compliance levels have steadily increased and are expected to improve further once the e-way Bill system (introduced from April 1, 2018) stabilises and invoicematching (to be introduced from September 2018) becomes a reality.

Increasing formalisation of the economy and linkage between direct and indirect tax return filings (small businesses are required to quote their GST identification numbers in their tax return forms for 2018-19) are also expected to check evasion.

Are tax rates lower? Not really. Indeed, the rate on many services has increased compared to the period prior to GST. But as revenues pick up, it should be possible to reduce rates.

Remember the initial attempt was to arrive at revenue-neutral rates. But once revenues rise and sectors at present excluded from GST—electricity, real estate, alcohol and petroleum products—are brought into the tax ambit, it should be possible to reduce both tax rates and the number of slabs from the six—0%, 5%, 12%, 18%, 28% and 28% + cess—we have at present.

Collections
Has GST added the promised 2% of GDP? On the contrary. Growth fell in the first year of GST’s implementation. From 7.1% in 2016-17, GDP growth rate fell to 6.7% in 2017-18. However, if one looks at sequential growth, the picture is quite different.

Quarter-on-quarter growth picked up to 7.7% in Q4 2017-18. And for the year as a whole, it’s likely to touch 7.4% in 2018-19, though how much of this is attributable to GST is debatable.

Has GoI collected more revenue? According to the finance ministry, the total revenue collected under GST between July 2017 and March 2018 was `7.41lakh crore. Collections surpassed the `1 lakh crore mark for the first time in April 2018. And though they declined to `94.02 crore in May 2018, all available indications suggest collections will grow in FY19. Against a monthly average collection of `89, 885 crore in the last fiscal, GoI expects to mop up an average of `1lakh crore this fiscal.

Sure, glitches remain. But these are largely in the operational domain and relate to issues such as return filing, invoice matching, reverse charge mechanism and technology. What is clear is that positives outweigh the negatives. So, unlike Malaysia, there is no turning the clock back on GST.

True, a year is much too short a period to judge a watershed event like GST’s implementation, much like former Chinese premier Zhou Enlai’s wry comment, “It’s too early to say,” when asked about the impact of the French Revolution.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

via GST | Narendra Modi: GST may not be the best in class, but it is far better than the earlier system

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