GST: Still halfway from realizing the full potential
Road ministry says that logistics costs have come down from around 14% to 10-12%, and distance covered by freight lorries has improved from 225km per day to 300-325km. Several rounds of GST tax rate cuts have sharply lowered the prices of most household items. However, services have not benefited from rate reductions, apart from a few like restaurants and property construction.
Ease of doing business has improved as the number of forms filed by businesses has come down from 495 to just 12. Business can recover Input tax (ie. cumulative indirect tax on purchases) and is not affected by "tax-on-tax" (or a cascade of irrecoverable taxes) of the previous regime. The new federal administration body ("GST council"), made up of central and state governments, will ensure uniformity of law across states (ie. not just tax rates).
Anticipating the sea change in taxation, the way of reporting and the uncertainties involved, businesses slowed down production in the weeks before GST roll-out. This is believed to have caused the sharp slowdown in gross domestic product (GDP) growth to 6% in the June quarter of FY18, compared to a 7% expansion in the fourth quarter of FY17 ending March 2017. Growth recovered in subsequent quarters with policymakers suspending some of the toughest provisions such as invoice-matching and extending deadlines for filing returns, in addition to handholding businesses and traders to navigate the new system. By the last quarter of FY18, growth had recovered to 8.1%, though after that the economy started cooling off. This trend continues with growth slowing down to 4.5% in the second quarter of FY20, its slowest pace since March 2013.
Ease of doing business has improved as the number of forms filed by businesses has come down from 495 to just 12. Business can recover Input tax (ie. cumulative indirect tax on purchases) and is not affected by "tax-on-tax" (or a cascade of irrecoverable taxes) of the previous regime. The new federal administration body ("GST council"), made up of central and state governments, will ensure uniformity of law across states (ie. not just tax rates).
Anticipating the sea change in taxation, the way of reporting and the uncertainties involved, businesses slowed down production in the weeks before GST roll-out. This is believed to have caused the sharp slowdown in gross domestic product (GDP) growth to 6% in the June quarter of FY18, compared to a 7% expansion in the fourth quarter of FY17 ending March 2017. Growth recovered in subsequent quarters with policymakers suspending some of the toughest provisions such as invoice-matching and extending deadlines for filing returns, in addition to handholding businesses and traders to navigate the new system. By the last quarter of FY18, growth had recovered to 8.1%, though after that the economy started cooling off. This trend continues with growth slowing down to 4.5% in the second quarter of FY20, its slowest pace since March 2013.
Deepening economic slowdown and shortfalls in GST revenues are testing the assumptions made at the onset, such as that GST could spur the economic growth rate by 1-2 percentage points and that an efficient and distortion-free tax system would curtail tax evasion and provide much higher tax revenues. Experts point out that it is too early to judge GST by the current trends in economic growth and revenue collections. “It will take about five years to realize the full potential of GST. We are halfway towards that goal. Now we should allow GST to settle and only incremental changes should be made".
Conclusions
GST is a simpler regime than the earlier fragmented system, but all parties agree that it should be further simplified (particularly by trimming the number of GST rates). GST system has ensured near full uniformity across states, though states can levy different rates for petroleum, electricity and real estate, except under-construction properties. GST has removed internal trade barriers and improved Ease of doing business.
The tax efficiency (through distortion-free system & simple Input tax deductions) will no doubt bring dividends to the economy in due course. Dealing with issues such as the inclusion of currently excluded sectors and clarity on issues like intra-company services between two offices will help. The voluntary settlement of differences without penalty will ease some of the concerns of the industry. Further technology enhancements will help to increase compliance and widen the tax base further.
The tax efficiency (through distortion-free system & simple Input tax deductions) will no doubt bring dividends to the economy in due course. Dealing with issues such as the inclusion of currently excluded sectors and clarity on issues like intra-company services between two offices will help. The voluntary settlement of differences without penalty will ease some of the concerns of the industry. Further technology enhancements will help to increase compliance and widen the tax base further.
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