New Delhi: On 1 July, the government made an ambitious shift to what it promised was a modern, transparent and technology-driven indirect tax system to sharpen the competitive edge of a $2.3 trillion Indian economy riven by internal trade barriers and a raft of central, state and local taxes.
The goods and services tax (GST) was hailed as the biggest tax reform by India in 70 years of independence, a potential game-changer that would, at one stroke, unite the country of 1.3 billion people into a common market by dismantling inter-state tariff barriers.
GST subsumed 17 central, state and local taxes in line with the “one nation, one market, one tax” concept on which it was based. The new regime had tax slabs for goods and services—5%, 12%, 18% and 28%.
A little less than 100 days since it kicked in, the new system is yet to settle down. While many of the lofty and intangible goals set by the government will take time to achieve, the transition has witnessed inevitable shocks.
Businesses slowed production ahead of the rollout of GST to minimize tax complications while shifting to the new system. This in part led to economic growth in the April-June quarter decelerating to 5.7%, the slowest pace in three years, from 6.1% in the preceding three months.
Businesses and traders also struggled to measure up in the first two monthly tax-filing cycles, making headlines about inadequate preparedness for the massive tax reform.
Growth impact
Going by the experience of other countries that adopted GST, some economists had predicted that the tax reform would boost India’s economic growth rate by up to two percentage points in due course as it eliminates inefficiencies in the tax system.
Under GST, tax is levied only on the amount of value added at each stage in the supply chain. Businesses get a rebate for the taxes paid on raw materials and services used, which will make them more competitive as it eliminates “tax on tax”.
However, the production slowdown in the run-up to the implementation of the tax reform in July has had an adverse impact on supplies.
“The disruption caused by implementation of GST was confined to the informal sector of the economy and it has largely bottomed out in July. Its effect will now taper off,” said Rajiv Kumar, vice-chairman of NITI Aayog, the federal policy think tank.
Kumar endorsed the Asian Development Bank (ADB)’s economic growth forecast for India. ADB, which follows a calendar year, on 27 September revised its 2017 growth forecast for India to 7% from its July estimate of 7.4%, reflecting “short-term disruptions” such as last year’s demonetization and the GST rollout that it expected to “dissipate”.
Some of the impact on the economy on account of destocking of goods prior to GST implementation has already started easing, said D.K. Joshi, chief economist at credit rating agency Crisil Ltd.
Scale of reform
“In sectors such as logistics, the benefit of GST is immediately visible in terms of efficiency, while a boost to the economic growth rate that GST is expected to fetch is a medium-term goal,” said Joshi.
What brings uncertainty about how soon businesses and the information technology (IT) systems supporting GST could settle down is the unprecedented nature and scale of the tax reform that threw up unexpected challenges to policymakers and to the IT infrastructure.
ALSO READ: GST: Disruptive but developmental
While large businesses have their own IT systems and resources to meet the requirements of GST, the informal sector of the economy, comprising small and medium enterprises (SMEs), bore the brunt of the transition impact.
GST encourages the informal part of the economy to get integrated into the formal one by way of tax rebates to registered assessees. This compels small firms to either sign up for GST or lose their competitiveness and, therefore, their clients.
Integrating the informal economy with the formal one is expected to eventually lead to a wider base not only of indirect taxes, but also of direct taxes.
Glitches
Technical glitches experienced by many assessees forced the GST Council, the federal tax body led by Union finance minister Arun Jaitley, to extend various deadlines for filing summary returns as well as detailed invoice-level details for the months of July and August.
Difficulties faced by businesses included the tax payment not getting reflected in their wallets at the time of filing returns, absence of certain software utilities and non-responsiveness of the website of the GST Network (GSTN), the IT infrastructure backing the new indirect tax regime.
A ministerial panel led by Bihar deputy chief minister Sushil Kumar Modi has given Infosys Ltd, which set up the IT network for GSTN, time till October-end to fix 80% of the technical problems.
Compared to July, businesses found filing GST returns and paying taxes smoother in August as GSTN focused on addressing the issue of “unanticipated user conditions”. This refers to certain combinations of factors that result in errors in rare cases.
Traders say the IT system has posed grave difficulties for them. “Lack of awareness and education about GST affects compliance of traders in smaller towns. More than 60% of traders do not have computers, which makes compliance a challenge for them,” said Confederation of All India Traders (CAIT) secretary general Praveen Khandelwal.
Self-policing system
Taxpayers’ difficulty in adjusting to GST, however, cannot entirely be blamed on technical glitches.
That is because GST, a technology-driven self-policing system, has raised the compliance bar. The new tax system has ushered in a paradigm change in taxation, wherein the only interface between the authorities and the taxpayer is technology.
“Collection and matching of invoice-level data was first started by Gujarat and Karnataka followed by seven others—Andhra Pradesh, Telangana, Kerala, Tamil Nadu, Uttar Pradesh, Chandigarh and Jammu and Kashmir. Now this exercise is being extended to the whole country under GST,” said Prakash Kumar, chief executive officer of GSTN.
ALSO READ: GST and the shift from the informal to the formal sector
Invoice matching ensures that a rebate is given to a business only if tax on the item is paid to the government by the material or service supplier. Earlier, tax credits were available based merely on the invoice from a supplier, even if he had not remitted to the government the tax collected from his customer. That had led to instances of fraud, which is not possible under GST.
Revenue impact
“Under GST, the level of details required relating to transactions is high and the learning curve of assessees and tax practitioners is steep,” the person cited above said, adding that the features of GST insist on a high level of discipline. Many businesses are not used to this kind of IT-driven compliance and faced difficulties in measuring up.
The Union and state governments collected Rs90,669 crore as GST in August, 3.6% less than in July. However, only a little more than half of the 6.8 million assessees who were required to remit taxes and file GST returns met the deadline in August. It implies that either the actual receipts may go up further as many who missed the last date opt for paying taxes with interest. While GST collections are in line with the combined target for the Union and state governments, it is not yet clear if individual states have met their targets. If not, the centre will have to compensate them.
“We can say a good beginning has been made. GST implementation has been smoother than we expected barring technology glitches. Prices have not gone up, nor has there been any shortage of goods. There has been no widespread protests except in the case of textile industry,” said Pratik Jain, partner and leader of indirect tax at PwC India. “However, there is a lot to be done to fine-tune the new system. Procedural simplification, trimming the tax slabs and addressing the concerns of exporters and small and medium enterprises are among them.”