With better compliance resulting from a large number of businesses moving into the formal economy, tax revenues in the post-GST regime will get a boost—the very fact of input-matching will get more into the tax net. To the extent GST has been fashioned to be non-inflationary and lower rates, it can even lead to a rebound in demand. However, a change in the method of taxation of this magnitude is bound to have it share of teething troubles and there will be supply disruptions. Smaller companies, for instance, could find the compliance onerous in the initial stages, though it is likely most of those with a turnover of between Rs 20 lakh and Rs 75 lakh will opt for the presumptive tax. Even those businesses that have a turnover of over Rs 75 lakh will, ultimately, prefer to be part of the organised supply chain for fear of losing out on business.
Till the system settles down, though, business could lose some momentum. For example, since it will take time for firms to get the benefits of input tax credit, their working capital cycles will be stretched, thereby increasing costs. Also, as their costs increase due to the higher compliance, many of the smaller firms could find themselves becoming uncompetitive and compelled to scale down operations.
In the process, they may be compelled to let go of people. In the run up to the GST, even bigger manufacturers and retailers have trimmed inventory but at a cost, leaving them with smaller surpluses. It is possible companies will tread cautiously and wait for the system to settle down before ramping up operations. The good news, though, is that the festive season sets in very early this year, and since most producers of consumer goods make at least a third of their annual revenues during this period, they would make the effort to adjust to the system.
With the effects of demonetisation now wearing out and the monsoon expected to result in a bumper crop, there’s reason to believe demand will bounce back over the next few months. Nevertheless, given the disruption and de-stocking in the first quarter of FY18, there could be some shortfall in indirect tax collections for the year pegged in the budget for FY18 at Rs 6.81 lakh crore.
However, given how many more individuals and companies are estimated to come into the tax fold, post-demonetisation and even post-GST as more firms/businesses declare more realistic numbers, direct tax collections could exceed the budget estimates of Rs 9.79 lakh crore. The CBDT had recently revealed that registrations—for businesses and individuals—had risen to 0.2-0.3 million a day from 0.1 million a day prior to demonetisation. As of now, therefore, there isn’t too much reason to worry about tax collections and the fiscal deficit.
However, even if total tax collections don’t come in as per the estimates, the government may want to continue to spend as it had planned. Any cut in expenditure could lead to a loss in momentum for the economy, at a time when there is very little private sector investment. In fact, without the push from government consumption, which rose 32% y-o-y in Q4FY17, GDP would not even have grown by 6.1%. If the economy is to grow by about 7% this year, there needs to be a meaningful contribution from government spending.