Five years after India’s tax reforms, it may be too early to celebrate

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Although India’s Goods and Services Tax has increased in value over the past five years, some analysts feel it may be premature to celebrate.

Although the GST revenue collection is greater in absolute terms, it may not continue to grow.

Abhijit Mokhopadhyay is a senior fellow at Observer Research Foundation. “If the Indian economy slows down, GST collection may be negatively affected.”

Divergent opinions exist about whether GST has made India an attractive investment destination, or if it has succeeded in curbing “black cash.”

Image Source – Business Standared

It’s been five years since India introduced its Goods and Services Tax, and while the government’s revenue collection has soared, some analysts say it may be premature to celebrate.

The world’s fifth largest economy with a GDP of more than $3 trillion, India, has doubled its tax base since the introduction of GST in July 2017.

Analysts point out that even though collections have increased and compliance has improved, it doesn’t necessarily lead to economic growth.

Government statistics show that GST collections grew from 7.2 trillion rupees, or $90 billion, in the fiscal year 2017-2018 to 14.8 trillion rupees in the fiscal year ending March 2022.

Even though GST revenues are higher in absolute terms, some question whether the growth will last.

An economics expert from New Delhi-based think tank, Observer Research Foundation, told that future GST collections are dependent on the economic growth of the Indian economy. If growth slows down further, then GST collections will be negatively affected .

“Somehow a thumb rule has emerged that says if monthly GST collection crosses 1 trillion rupees, or $12 billion, it’s a success,” he said.

Among other things, rising inflation is likely to reduce demand and result in lower collections, Mukhopadhyay said. the rise in commodity and food prices has significantly contributed to GST collection. If inflation continues to increase, it will eventually dampen its effect,” he explained.

GST in India has been achieved

In enacting the goods and services tax, the government of Prime Minister Narendra Modi combined 17 local taxes, including excise duties, service taxes, value-added taxes, and 13 other charges.

These varied taxes were replaced by four rate structures, ranging from 5% on essential items to 28% on things like cars and luxury items under the new tax regime.

“GST remains a landmark tax reform of independent India, despite many implementation issues that have been experienced in its first five years,” Rajan Katoch, a former Indian heavy industries secretary,

It has not only raised coordination within the federal state, but it has also “improved tax buoyancy, curbed indirect tax evasion, and drawn more and more small taxpayers into the formal system,” Katoch said.

India’s tax system, which is often intricate and impenetrable, was notoriously difficult to navigate before GST was introduced.

As Modi described it, the “good and simple tax” has increased the number of registered taxpayers to 13.6 million from around 6 million five years ago, according to figures cited by Nirmala Sitharaman in local media.

Foreign investment, ‘black money’

Differing opinions exist about whether the GST has made India an attractive investment destination or whether it has been effective in curbing black money – untaxed income.

The Indian finance ministry released a “white paper” on black money in 2012, which the government defines as income for which taxes have not been paid.

According to former industry secretary Katoch, GST has impacted black money.

In the sense that GST has resulted in the formalization of previously informal transactions, yes, it would have led to a reduction in black or unaccounted cash flows. However, it is difficult to estimate the extent of the reduction.

However, not everyone agrees.

Black money is generated in real estate, trade and politics. In all three cases, cash is involved. Tax reform and demonetization have had little impact.

Demonetization was a controversial move by the Modi government in 2016 to withdraw high denomination notes as legal tender in order to flush out black money.

The government had hoped that the tax reforms would increase India’s attractiveness to foreign investors, but that may not have been true, says Baru, who was a media advisor to former Prime Minister Manmohan Singh.

the GST is supposed to make India more attractive to foreign investors, especially in the manufacturing sector, he said. “In practice, however, [foreign direct investment] in manufacturing has not been remarkable.”

Political wrangling to the fore

GST scheme faces more than just rising inflation.

India is expected to make a politically precarious decision in August about whether to include petrol, diesel, and so-called “sin goods” like liquor and tobacco under GST, a federal tax.

“Petro products should be included within the GST framework. This could drastically increase revenue and will also dampen inflation,” said Mukhopadhyay of the Observer Research Foundation.

Nonetheless, this is an ambitious goal that may prove difficult to reach. Duties on these goods are collected by state governments, which are often headed by political opponents, and it will be difficult to convince them to give up this lucrative revenue source.

Moreover, the federal government is also faced with other demands from state governments.

In 2017, the federal government began compensating state governments for some taxes they lost as a result of the GST.

Modi’s government could be in for a long political battle, even in states ruled by the BJP or its political allies.

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