Five years after its launch, the simplified GST scheme has resulted in tax collection in India reaching record levels.
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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.
What India’s GST Has Achieved
The goods and services tax, which was enacted by the government of Prime Minister Narendra Modi, included 17 local levies such as excise taxes, service taxes and value added taxes. and 13 other charges.
Under the national tax regime, these various taxes they were replaced by four rate structures ranging from a 5% tax on essential items to a top rate of 28% on things like cars and luxury goods.
“GST remains a landmark tax reform of independent India, despite many implementation problems that have been experienced in its first five years,” Rajan Katoch, India’s former heavy industries secretary, told CNBC.
It has not only strengthened coordination within the federal state, but has also “improved fiscal buoyancy, curbed indirect tax evasion and attracted more and smaller taxpayers to the formal system,” Katoch said.
The introduction of the GST mechanism helped to subsume multiple indirect tax rates to provide a cleaner and more predictable structure.
Senior Economist and CEO, DBS Bank, Singapore
Before the GST was introduced, India’s often convoluted and impenetrable tax system was notoriously difficult to navigate.
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.
Impact on foreign investment, ‘black money’
There are differing views on whether GST has made India a more attractive investment destination or whether it has been effective in curbing “black money” – undeclared income that has not been taxed.
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.
GST cannot fuel growth. Rather, growth drives GST collection. Therefore, future GST collection will depend on the growth performance of the Indian economy.
Senior Researcher, Observer Research Foundation, New Delhi.
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.
political dispute ahead
Rising inflation is not the only cloud on the horizon for the GST scheme.
India is expected to make a politically precarious decision in August on whether to subject gasoline, diesel and so-called “sinful goods” such as liquor and tobacco to GST, a federal tax.
“Petroleum products should be included under the GST. That can dramatically increase revenue and will also reduce inflation,” said Mukhopadhyay of the Observer Research Foundation.
However, it is an ambitious goal and could become a political challenge. Duties on these goods are now collected by state governments, led in some cases by political opponents, and it will not be easy to persuade them to give up this lucrative source of income.
Separately, the federal government is also facing other lawsuits from state governments.
Since 2017, the federal government has been compensating state governments for some tax revenue they lost as a result of the GST.
“That ended June 30, but the states are now seeking an extension, citing the ‘lost’ two. years of pandemic,” Kranthi Bathini, an equity strategist at macroeconomics firm WealthMills in Mumbai, told CNBC.
For the Modi government, this lawsuit could be the start of a long political fight, including in states ruled by its ruling BJP or its political allies.
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