One year of GST: Hits, misses and looking ahead
One of the biggest economic reforms of independent India - the Goods & Services Tax (GST) - was introduced a year ago, on 1st July 2017. It had taken more than 15 years of discussions to implement a tax system that is fairly standard across the globe. Around 160 countries have GST or uniform VAT and it was imperative that we adopt this modern tax system. With the GST replacing the erstwhile VAT, Excise, Octroi and Service tax, we finally achieved the concept of ‘one nation one tax’.Indeed there are four tax slabs within GST (France, the first country to implement GST in 1954, also has four rates). So it is not really a single rate (as in many other countries) but we still have the same tax on the same product across different states. This is a big change from before.
To give an example, till June 2017, the same television set could be taxed differently across the country depending on where it was sold. This led states to charge Octroi at the check post of entry into their jurisdictions. But with GST having subsumed Octroi and equalized tax rates across states, the check posts have disappeared. For instance the Walayar check post on the Kerala-Tamil Nadu border used to be notorious for holding up trucks for many days. In a survey we had conducted a few years back, business owners in Kerala identified this check post as a major cause of delays, rising costs and loss in business. Now the check posts have disappeared and entry points like Walayar offer smooth passage to trucks. Inter-state movement of goods has become faster leading to improvements in business efficiency. Earlier companies had to set up separate warehouses in different states to avoid crossing borders. Now they are saving costs by having a few warehouses from where they serve the entire country. As a result, logistics industry is also thriving and creating jobs.
One of the major advantages of GST is the elimination of cascading effects of tax on tax. Now a manufacturer or seller claims refund from the government for the tax included in the price she has paid on goods purchased by her. This is supposed to bring down prices of goods sold to the customer. Unfortunately the data shows that consumer inflation has been on a rise in India ever since GST was introduced. This period coincided with global oil prices going up and that has a big impact on domestic prices. But it is also true that many countries have experienced a rise in prices in the initial period after GST implementation. In fact, Malaysia, where GST was introduced just one year before us, has recently abolished this tax (as per the electoral promise of the newly elected Prime Minister) as it had apparently caused a rise in prices.
International experience shows that inflation eventually comes down as businesses start receiving the tax refunds seamlessly and become more cost efficient. Malaysia’s decision is a hasty one and the country will pay heavily through massive loss in tax revenues. In India, GST has led to a widening of the tax base and monthly tax collections have touched Rs. 1 lakh crore. There has been a 50% increase in the number of business tax payers after introduction of GST. Tax evasion is coming down as more and more businesses file GST returns. It is very difficult to evade the tax as each business is part of a longer chain under GST which is tracked by the tax authorities. The increase in tax revenues will free up fiscal space for the government to invest in the social sector and infrastructure.
A major concern has been the poor implementation of GST. There were technical glitches in the online system of filing returns which are now getting sorted out. Many small businesses have been hit hard due to delay in getting tax refunds which has imposed a heavy cost on export sectors. India’s export growth has suffered in traditionally strong areas like textiles and leather even when competitor nations like Bangladesh and Vietnam are gaining market share. It is of critical importance that the government speeds up the tax refunds and makes return filing simpler. Industry associations and the accounting profession should support small businesses by hand holding them. Micro businesses (with turnover below Rs. 20 lakhs) are anyway exempt from paying GST. To make the GST regime simpler, the government should bring down the number of tax slabs to two or three which is the most common practice across the world. While there are short term costs associated with such a significant reform, the long term returns are huge. In the years ahead India will enjoy multi-fold benefits in the form of growth in GDP, tax collection and formal sector jobs thanks to the rare political consensus that helped to make GST a reality. And for that, our political classes cutting across party lines, deserve appreciation.
(Prof. Rudra Sensarma, Indian Institute of Management Kozhikode, website: www.rudrasensarma.info, Email:firstname.lastname@example.org)