On 1 July, the government made an ambitious shift to what it promised was a modern, transparent and technology-driven indirect tax system to sharpen the competitive edge of a $2.3 trillion Indian economy riven by internal trade barriers and a raft of central, state and local taxes.
The goods and services tax (GST) was hailed as the biggest tax reform by India in 70 years of independence, a potential game-changer that would, at one stroke, unite the country of 1.3 billion people into a common market by dismantling inter-state tariff barriers.
GST subsumed 17 central, state and local taxes in line with the “one nation, one market, one tax” concept on which it was based. The new regime had tax slabs for goods and services—5%, 12%, 18% and 28%.
A little less than 100 days since it kicked in, the new system is yet to settle down. While many of the lofty and intangible goals set by the government will take time to achieve, the transition has witnessed inevitable shocks.
Businesses slowed production ahead of the rollout of GST to minimize tax complications while shifting to the new system. This in part led to economic growth in the April-June quarter decelerating to 5.7%, the slowest pace in three years, from 6.1% in the preceding three months.
Businesses and traders also struggled to measure up in the first two monthly tax-filing cycles, making headlines about inadequate preparedness for the massive tax reform.
Going by the experience of other countries that adopted GST, some economists had predicted that the tax reform would boost India’s economic growth rate by up to two percentage points in due course as it eliminates inefficiencies in the tax system.
Under GST, tax is levied only on the amount of value added at each stage in the supply chain. Businesses get a rebate for the taxes paid on raw materials and services used, which will make them more competitive as it eliminates “tax on tax”.
However, the production slowdown in the run-up to the implementation of the tax reform in July has had an adverse impact on supplies.
“The disruption caused by implementation of GST was confined to the informal sector of the economy and it has largely bottomed out in July. Its effect will now taper off,” said Rajiv Kumar, vice-chairman of NITI Aayog, the federal policy think tank.
Kumar endorsed the Asian Development Bank (ADB)’s economic growth forecast for India. ADB, which follows a calendar year, on 27 September revised its 2017 growth forecast for India to 7% from its July estimate of 7.4%, reflecting “short-term disruptions” such as last year’s demonetization and the GST rollout that it expected to “dissipate”.
The disruption caused by implementation of GST was confined to the informal sector of the economy and it has largely bottomed out in July. Its effect will now taper off– Rajiv Kumar, vice chairman of NITI Aayog
Some of the impact on the economy on account of destocking of goods prior to GST implementation has already started easing, said D.K. Joshi, chief economist at credit rating agency Crisil Ltd.
Scale of reform
“In sectors such as logistics, the benefit of GST is immediately visible in terms of efficiency, while a boost to the economic growth rate that GST is expected to fetch is a medium-term goal,” said Joshi.
What brings uncertainty about how soon businesses and the information technology (IT) systems supporting GST could settle down is the unprecedented nature and scale of the tax reform that threw up unexpected challenges to policymakers and to the IT infrastructure.
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While large businesses have their own IT systems and resources to meet the requirements of GST, the informal sector of the economy, comprising small and medium enterprises (SMEs), bore the brunt of the transition impact.
GST encourages the informal part of the economy to get integrated into the formal one by way of tax rebates to registered assessees. This compels small firms to either sign up for GST or lose their competitiveness and, therefore, their clients.
Integrating the informal economy with the formal one is expected to eventually lead to a wider base not only of indirect taxes, but also of direct taxes.
Technical glitches experienced by many assessees forced the GST Council, the federal tax body led by Union finance minister Arun Jaitley, to extend various deadlines for filing summary returns as well as detailed invoice-level details for the months of July and August.
Difficulties faced by businesses included the tax payment not getting reflected in their wallets at the time of filing returns, absence of certain software utilities and non-responsiveness of the website of the GST Network (GSTN), the IT infrastructure backing the new indirect tax regime.
A ministerial panel led by Bihar deputy chief minister Sushil Kumar Modi has given Infosys Ltd, which set up the IT network for GSTN, time till October-end to fix 80% of the technical problems.
Compared to July, businesses found filing GST returns and paying taxes smoother in August as GSTN focused on addressing the issue of “unanticipated user conditions”. This refers to certain combinations of factors that result in errors in rare cases.
Traders say the IT system has posed grave difficulties for them. “Lack of awareness and education about GST affects compliance of traders in smaller towns. More than 60% of traders do not have computers, which makes compliance a challenge for them,” said Confederation of All India Traders (CAIT) secretary general Praveen Khandelwal.
Taxpayers’ difficulty in adjusting to GST, however, cannot entirely be blamed on technical glitches.
That is because GST, a technology-driven self-policing system, has raised the compliance bar. The new tax system has ushered in a paradigm change in taxation, wherein the only interface between the authorities and the taxpayer is technology.
“Collection and matching of invoice-level data was first started by Gujarat and Karnataka followed by seven others—Andhra Pradesh, Telangana, Kerala, Tamil Nadu, Uttar Pradesh, Chandigarh and Jammu and Kashmir. Now this exercise is being extended to the whole country under GST,” said Prakash Kumar, chief executive officer of GSTN.
Source : http://www.livemint.com/Politics/O5U4s67gDJbXHPUYdSfYaK/GST-shakes-up-Indian-economy-by-setting-the-compliance-bar-h.html