India’s Bold GST Reform Broadens the Tax Base, But Too Soon to Rejoice?
Five years after its launch, the simplified GST system has helped tax revenue in India to reach record highs.
Anand Purohit | time | Getty Images
It’s been 5 years since India introduced its Goods and Services Tax, and although government revenue collection has soared, some analysts say it may be too early for celebration.
While collections have increased and compliance has improved, analysts point out that this does not necessarily lead to economic growth.
Even though GST revenue collections are higher in absolute terms, some wonder if the growth in collections will last.
“GST cannot stimulate growth. On the contrary, growth stimulates the collection of GST. Thus, the future collection of GST will depend on the growth performance of the Indian economy. GST will be negatively affected,” said a senior researcher in New Delhi. Abhijit Mukhopadhyay, a think tank based at the Observer Research Foundation think tank, told CNBC.
“Somehow a rule of thumb has emerged that if the monthly GST collection exceeds 1 trillion rupees, or $12 billion, then it is a success,” he said. declared.
Among other things, rising inflation is likely to dampen demand and lead to lower collections, Mukhopadhyay said. “Rising commodity and food prices have contributed significantly to GST collection. If inflation continues to rise, it will eventually have a dampening effect,” he said.
The Goods and Services Tax – which was enacted by Prime Minister Narendra Modi’s government – encompassed 17 local levies such as excise duty, service tax and value added tax. and 13 other charges.
Under the national tax system, these various taxes were replaced with four tariff structures ranging from a 5% tax on essential items to a maximum rate of 28% on things like cars and luxury items.
“The GST remains a landmark tax reform of independent India, despite many implementation problems in its first five years,” Rajan Katoch, India’s former heavy industries secretary, told CNBC.
Not only has it strengthened coordination within the federal state, but it has also “improved tax dynamics, curbed indirect tax evasion and attracted more and more small taxpayers to the formal system,” Katoch said. .
Prior to the introduction of the GST, India’s often complex and impenetrable tax system was notoriously difficult to navigate.
The ‘good and simple tax’, as Modi described it, has increased the number of GST-registered taxpayers to 13.6 million from around 6 million five years ago, according to figures cited by India’s finance minister Nirmala Sitharaman. in an article in the local media.
There are differing opinions on whether the GST has made India a more attractive investment destination or whether it has been effective in curbing ‘black money’ – undeclared income on which no tax is levied. ‘had been paid.
Black money has long been known to play a role in India’s economic activity. 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 government or public authorities have not been paid”.
Former Industry Secretary Katoch says the GST has had an impact on black money.
“Since [GST] resulted in the formalization of transactions that were previously informal in nature, yes, this would have resulted in a reduction in black or unrecorded cash flow,” he said, adding that it is difficult to estimate the magnitude 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 impact,” he told CNBC Sanjaya Baru, an economist based in New Delhi.
Demonetization refers to the Modi government’s controversial decision in 2016 to remove high denomination banknotes as legal tender in order to flush out black money.
The government had hoped the tax reforms would increase India’s attractiveness to foreign investors, but that may not have been confirmed, according to Baru, who was media adviser to former prime minister Manmohan Singh.
“In theory, the GST is meant to make India more attractive to foreign investors, especially in the manufacturing sector,” he said. “In practice, however, [foreign direct investment] in the making was not very impressive.”
Although it cannot be directly attributed 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 have 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 indicates.
Rising inflation is not the only cloud on the horizon for the GST system.
India is expected to make a politically precarious decision in August on whether to subject petrol, diesel and so-called “products of sin” like alcohol and tobacco to GST, a federal tax.
“Petroleum products should be included as part of the GST. This can significantly increase income and curb inflation,” said Mukhopadhyay of the Observer Research Foundation.
However, this is an ambitious goal that 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 revenue stream.
Separately, the federal government also faces other demands from state governments.
Since 2017, the federal government has compensated state governments for certain tax revenue they lost due to the GST.
“It ended on June 30, but states are now asking for an extension, citing the two ‘lost’ pandemic years,” Kranthi Bathini, an equity strategist at macroeconomics firm WealthMills Securities in Mumbai, told CNBC.
For Modi’s government, this demand could be the start of a long political fight – even in states ruled by his ruling BJP or political allies.