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

It’s been 5 years since India introduced its goods and services tax, and while government revenue collection has soared, some analysts say it may be too soon to celebrate.

india-la fifth largest economy in the world with more than $3 trillion in GDP — has managed to double its tax base since the introduction of the GST in July 2017.

While collections have increased and compliance has improved, analysts say it doesn’t necessarily lead to economic growth.

GST collections grew from around 7.2 trillion rupees, or $90 billion, in the fiscal year 2017-2018 a Rs 14.8 trillion in fiscal year ending March 2022government statistics show.

Although GST revenue collection is higher in absolute terms, some question whether the growth in revenue will last.

“GST cannot drive growth. Rather, growth drives GST collection. Therefore, future GST collection will depend on the growth performance of the Indian economy. If growth slows further, GST collection GST will be negatively affected,” lead researcher from New Delhi. Abhijit Mukhopadhyay of the Observer Research Foundation think tank told CNBC.

“Somehow a rule of thumb has emerged that if the monthly GST collection crosses Rs 1 trillion, or $12 billion, then it’s a hit,” he said.

Among other things, rising inflation is likely to subdue demand and lead to reduced collections, Mukhopadhyay said. “Rising commodity and food prices have contributed substantially to GST collections. If inflation continues to rise, it will eventually have a dampening effect,” he said.

The “good and simple tax”, as Modi described it, has expanded the number of registered GST payers to 13.6 million from around 6 million five years ago, according to figures cited by Indian Finance Minister Nirmala Sitharaman. in an article in local media.

Black money has long been known to play a role in economic activity in India. In 2012, the Indian Ministry of Finance published a “white paper” on black money, defined by the government as “any income on which taxes imposed by the government or public authorities have not been paid.”

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

“As [GST] has resulted in the formalization of transactions that were previously informal in nature, yes, it would have led to a reduction in black or unaccounted for 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 demonetization nor tax reform has had much of an impact,” Sanjaya Baru, a New Delhi-based economist, told CNBC.

Demonetization refers to the Modi government’s controversial move in 2016 to withdraw high-denomination banknotes as legal tender. as a way to eliminate black money.

The government hoped the tax reforms would increase India’s attractiveness to foreign investors, but this may not have been confirmed, according to Baru, who was a media adviser to former Prime Minister Manmohan Singh.

“In theory, GST is supposed to make India more attractive to foreign investors, especially in the manufacturing sector,” he said. “In practice, however, [foreign direct investment] in the making it hasn’t been very impressive.

The World Bank’s Doing Business ranking for India rose to 63rd place in 2020 of Position 100 in 2017 – a jump of 37 places in a span of 3 years.

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

“The administration’s reform efforts targeted all areas measured by Doing Business, with a focus on paying taxes, trading across borders and resolving insolvency.” The World Bank’s 2020 report said.