One year of GST: Integration of unorganised sector is major achievement; govt must ensure transmission of lower taxes to consumers

Editor's note: It has been a year since the Narendra Modi government rolled out the Goods and Services Tax (GST), on 1 July, 2017. The introduction of the indirect tax regime marked the end of over a decade of wrangling, when politicians struggled to build consensus across party lines. Firstpost is publishing a series of articles wherein experts will analyse the triumphs and the pitfalls of the roll out of the GST.

The Goods and Service Tax (GST) was probably the biggest and most important economic reform ushered in by the government. As such a reform does have a disruptive effect it was timed well to run for almost two years before the General Elections in 2019. Politically it was an astute move to implement GST in 2017 so that there would be enough time for the system to absorb this deep reform. While passing a judgment of its success in the first year may be a bit bold considering that the comprehensive impact is normally likely to be felt after at least 3 years as the system adjusts to the new rules of the game, upfront it can be said that there are more positives to highlight, even while the work is in progress.

Let us go back to what were the main motivations for getting in the GST. The first is that this is the ideal system where there is a single tax rate across the country which makes it easy for everyone to understand. The plethora of state taxes and central duties had made things difficult for players and there were avenues for dodging the system as well as bribes which go with such imperfect structures. Second, by having a GST it was to make doing business easier with transparent rules. Third, the GST was to bring on board the unorganised sector which hitherto was out for historical reasons. Fourth, GST was to be revenue neutral at the end of the day while prices too would on the whole even off and the system would be inflation neutral. Fifth, compliance was to become easier as one did not have to face human beings and could do all the work online.

How has it turned out to be after one year of operation? To begin with there are still 5 rates of taxation which to an extent does vitiate the concept but the fact that there are single taxes in the form of the CGST or SGST or IGST makes it easier. The GST Council has lowered rates twice which is a positive sign because no system can get things right at first shot and fine tuning is required along the way to ensure that tax rates are aligned.

Representational image. PTI

The only quarrel that one may have here is that the government has kept petrol and diesel out of the fold for strategic reasons mainly because it is a cash cow for the treasury. With the total tax rate being 60-90 percent for diesel and petrol, bringing the same under GST would mean compromising on revenue. The result as was seen is that it can add to inflation with the VAT rates being ad valorem.

The government has shown that the earnings have been around Rs 90,000 cr a month last year while the transfer of around Rs 40,000 as compensation for FY18 is not very high and gives the feeling that collections have largely being going on track. FY19 will be important as it is the first full year of GST and the revenue garnered and distributed between the centre and states will tell us more about how it has been affected. While states have not always received their share on time from the centre, by the end of the year things have been evened out in a rather smooth manner.

On inflation, so far there is little evidence to suggest that there has been an upward tendency as food has been kept out of GST, which is a large part of the CPI basket. While services have become more expensive, the impact on inflation at the aggregate level remains muted. Quite clearly it is only the non-GST basket i.e. fuel which will need careful monitoring.

But on the converse, it is also true that several product prices have not come down after GST and while there are cases of dispute against companies for not lowering the rates under anti-profiteering clause, this can be one of the points that have to be tackled by the government to ensure there is better transmission of lower duties/taxes to the consumer. This it may be remembered was always a concern.

On GDP growth, though the reasoning has always been weak, it would be too early to draw a link as such a process can only take place over a period of time. In fact there are some scattered instances of SMEs being affected negatively by GST leading to financial stress as well as sales being affected by this tax system. Therefore, if at all there is a link, it would be negative in FY18 which can become neutral over time.

The one major achievement here would be the integration of the unorganised sector which is work in progress. But this has been a giant step whereby all producers enter the system in order to take the tax credit involved. This would mean that after the system adjusts, almost all the economic activity in the country would be in the formal chain as no one will deal with anyone who is not GST compliant. This has started happening and though there are pain points for the smaller players, it can be hoped that this would be temporary.

On the other side it is still not clear if it has brought down the quantum of black money as cash transactions still prevail when it comes to property in particular where discounts are to be had when payment is partly in cash. This would probably be the only major leakage from the system which may be hard to contain.

The one serious cost is one of compliance and the number of returns that have to be filed may have increased the cost as it does require use of professional help to adhere to the new rules. As there are monthly and annual filings and also compulsions of matching the tax credits with the value chain dealt with, there are more challenges for the economic agents in the system. This is one area where the Tax department should work on to simplify things and penalizing deviations in FY18 may add additional cost.

In general it can be said that the GST has been implemented quite smoothly and with a proactive stance taken by the government, the creases are being evened out. This is definitely the most important reform introduced in these 4 years (probably on par with the IBC) and given the scale and scepticism which preceded its implementation, the outcome has been more than satisfactory in the first year of its running. 7.5/10 is what can be given here.

(The writer, chief economist, CARE Ratings, is author of 'Economics of India: How to Fool all people for all times')

Read the other articles from the series here: 

One year of GST: The roller-coaster ride is over and businesses are now prepping to switch to cruise control

One year of GST: Tax regime is anything but good and simple; govt can simplify it to improve ease of doing business

One year of GST: The tax regime is helping reduce shady realty transactions, but property prices aren’t down

One year of GST: Government could push a raft of anti-evasion measures if compliance or collections dip

One year of GST: With compliance at 69%, tax collections have begun to stabilise; time to make process smooth

One year of GST: Indirect tax regime is a great success; has led to growth in GDP, says Adi Godrej