The year 2017 will be forever etched in Indian history—in which arguably the biggest economic reform took place in the form of goods and services tax (GST). Rightfully, the implementation of GST was celebrated in the Parliament on the midnight of June 30. While it was known that our version of GST was far from perfect, but the euphoria and hope that it generated was quite unprecedented. Before the roll out of GST, the US Federal Reserve in a study predicted that an aggregate weighted GST of 16% could lead to a positive impact on real GDP by 4.2%, whereas at 20% it would result in a positive impact of 3.1% on GDP. The global ratings agency Moody’s said the GST regime will be positive for India’s credit profile as it will contribute to productivity gains and higher GDP growth, as well as support higher government revenue generation through improved tax compliance.
Looking back now, while the impact may not have been as dramatic as predicted, the initial six months are indicative of some long structural changes that we are likely to witness. Latest data reflect that over 20 lakh new businesses are now registered for GST, with the total number exceeding 99 lakh. Clearly, the tax base has expanded. The customers are asking their vendors to register and pass on the benefit of input credit. Many in the unorganised sector believe that ‘cash’ transactions are increasingly becoming difficult due to GST, along with other measures that have been taken by the government. Due to the ‘invoice matching’ mechanism under GST (though deferred for the time being), there is an apparent ‘mindset’ change towards increased compliance.
While the expansion in tax base does not appear to be reflected in increased revenues (December 17 collection of Rs 80,808 crore being the lowest till now), in view of transition credits, recent rate cuts and bringing back the upfront exemption for exporters, collection has not yet stabilised. It is expected that the last quarter of the fiscal year would be a better reflection of future revenues.
However, more than one-third of those registered for GST are still not filing the monthly returns, which is a cause of concern for the government, though the percentage of compliance is steadily improving over the last couple of months. In the long run, the tax-to-GDP ratio is bound to increase due to GST.
The low level of compliance has also given rise to some tightening of tax administration, the rigours of which is likely to be felt by industry over the next few months. Implementation of a nationwide e-way bill system from February 1, 2018, despite a contrary advice from the advisory committee on GST set up by the government, is one such example.
Many argue that if invoice level matching operates effectively then it would substantially reduce the risk of evasion and an e-way bill kind of mechanism would not be needed at all. One hopes that in the government’s eagerness to simplify compliances, this fundamental feature would not be compromised with.
It is important that the initial teething problems with GSTN do not become a barometer of GST’s success. GSTN is a world-class system that India has created. Amongst others, the system also offers invoice level granular data for all business transactions, which can then be mined and analysed to check evasion not only for GST, but also for income tax. For instance, with the purchase data of PAN-based GST numbers of both suppliers and customers, it can be easily found out if income tax has been appropriately withheld or not. This can potentially shape the tax administration of the future and lead to convergence of income tax and GST departments.
From the industry point of view, business decisions are now largely based on commercial rationale, not on tax considerations. This will shift the focus from compliance readiness to ‘value creation’ by relooking at supply chain models, contract structures and manpower rationalisation. However, they will need to keep navigating through uncertainties as the GST structure continues to evolve. One such area is anti-profiteering provisions, which requires continues and careful monitoring of prices.
The new year might bring in few fundamental changes, including significant easing of compliances and rate rationalisation. We might see many more items under the 28% bracket to be brought down to 18%. If 18% and 12% categories are merged into one, as is being talked about now, it would be a substantial improvement.Consensus seems to be emerging for bringing in real estate and industrial fuels like natural gas and ATF within the ambit of GST, but that might only happen once there is a little more stability in revenue collection. With the wealth of experience of the last six months for the government as well as industry, GST 2.0 is likely to be a much improved version.