As with any structural reform, GST too is evolving and will eventually accommodate excluded items
One year is perhaps a short time to evaluate the performance of GST but its still worth an assessment. I had predicted almost a year ago that GST would improve tax compliance — and, thereby, increase tax revenues — and ‘ease of doing business’ and that these would be the major gains of this critical tax reform.
Better tax compliance
Within one year of GST launch, 48 lakh enterprises have been added as compared with 66 lakh enterprises registered in all these years since Independence. This may be attributed to the simple procedures adopted under GST.
An analysis in the ‘Economic Survey’ explains the reason for this phenomenal increase in indirect tax payers. Majority of the new registrants come from the business-to-business (B2B) segment and small enterprises who have voluntarily chosen to register — although they could have opted out because of their turnover — as they can seek to get the benefit of input tax credit. This became possible because GST has integrated the entire value chain, from raw material to retail.
According to the Economic Survey, there is a 50 per cent increase in unique indirect tax payers under GST compared with the pre-GST system. This is a landmark achievement and proof that India is fast transforming from a tax non-compliant society to a tax-compliant one.
Increase in tax revenues
The initial concerns were of course born out of the roller-coaster nature of GST collections. But with ₹1 lakh crore in April 2018, those concerns have been finally put to rest.
Most of the States have participated in this revenue gain and have almost retained their pre-GST revenue shares in the total tax revenue. States can improve their revenue collection if they build capacity in their commercial tax departments by using advanced data analytics to identify leakages.
With GST, the intimidating task of complying with and paying around 17 different taxes has now been reduced to a State GST and a Central GST. This effect of the GST reform is a big deal for all businesses and consumers, especially small businesses for whom the cost and effort of compliance with complex and often corruption ridden inter-State trade was intimidating and discouraging.
This reduction in the cost of compliance is not trivial and has brought down costs and increased the ease of doing business, directly benefiting small and big businesses. The creation of one Indian market has created better competition and efficiency in our economy and has benefited consumers of goods and services around the country.
If there is one thing that differentiated the NDA Government’s approach to GST compared to the UPA’s approach, it was the approach of partnership with the State governments.
Prime Minister Modi has hailed GST as a great example of cooperative federalism, where all States decided to take a unanimous decision in the interest of the nation. A complex and huge tax reform like the GST would not have been possible without cooperation of State governments and a decisive leadership at the Centre. The GST Council is India’s first real federal institution and has lived up to its expectations so far and has responded proactively to transitional problems faced by industry and trade.
As Max Weber puts it, “Reform is the slow boring of hard boards.” Most governments pushing reforms end up bearing the political costs upfront and early, with the benefits evolving over the medium term. That requires a certain determination and belief in the political leadership and Modi has certainly delivered that despite all the petty political potshots of ‘Gabbar Singh Tax’, etc.
As with real structural reforms, GST too is evolving and will grow and expand to include excluded items, especially, real estate and petroleum products, within its coverage. Inclusion of real estate will clean up the land market, which is one of the biggest generators of black money.
It is still early days for the full impact of GST to play out on our economy and business.
But in the coming years, GST will live up to the Prime Minister’s description of it as a ‘Good Simple Tax’ and our expectation that it would expand the indirect tax net and revenues and, therefore, the economy.