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Goods and Service Tax Act: Has It Met Our Expectations?

Goods and Services Tax introduced at a special parliament session on the mid-night of June 30th – July 1st, 2017 with significant hype. It has been quoted as the second historic change since independence, and there was a comparison drawn with the independence movement itself. GST in India was a topic of considerable speculation as advantages of GST were significant. Still, at the same time, the implementation was seen as a hurried move by the government. There was much criticism about the unpreparedness of the framework and lack of smooth working machinery when GST was launched. Still, it quickly turned into an efficient tax system which had a tremendous impact on how India paid taxes. On a larger scale, it was determinantal of how the economy of the country would move forward.

Initial Expectations

Goods and Services tax subsumed 17 indirect taxes into a single tax. The great idea of one nation – one tax – one market became a reality. With the launch of GST, it turned India into a market of 2.6 trillion dollars with a population of about 1.2 billion people. It was a great move towards creating numerous opportunities for foreign as well as domestic investments. But there was not a total clarity among businessmen as well as ordinary taxpayers. It created some scepticism connected with the new tax law among different sectors. As the new law was a transformational change where the whole tax system changed and replaced with the new one, there were also high expectations that build around the launch of GST.

Mixed Expectations: Some expected that this new tax regime is going to strengthen the federal structure of India. There was a natural expectation that there would be great ease of doing business. That it will help stop corruption to a great extent and bring more transparency in tax collection. With the removal of the cascading effect or “tax – on – tax” system, there was an expectation of benefiting suppliers at every stage of supply.

Revenue Generation and Growth: There were expectations that the revenue will increase many folds and will reduce tax evasion. There was an expectation that it would promote equity and enhance transparency, not just with the taxpayers to the government but also among the taxpayers through the concept of GSTIN. With GSTIN it became easy to verify if a supplier is genuine and that would help in creating greater transparency. There was an expectation of GDP growth by 2 to 2.5% that would also accelerate investments and job creation. 

The government was expecting an increase in revenue with the extensive coverage of GST, and because of the robust system, there would be minimum leakage. There was an expectation that a 10% tax on “declared” agriculture income would yield 2000 trillion. Still, it was also rejected by the finance minister because the farm-based income is rare in India and that dubious taxpayers might show illegal money as agricultural income. 

Transaction Costs: India’s position of ease of doing business in 2015, according to the world bank, was intensely poor at a rank of 130 out of 198 countries. There were expectations that by removing the various indirect state and central taxes and with the e-way bill and invoice system, there will be a significant increase in ease of doing business. The checkpoints at state and city entry points were a hurdle and increased transit time and logistic costs. Trucks in India spend about 60% of their travel time at checkpoints. The drivers clock an average of 250 to 280 km per day, which is way lower than the world average of 400 km per day. These add a value of about 13-14% to the goods, and in comparison, other countries add only about 6-8%. There was an expectation that the removal of various taxes would decrease the travelling time of those trust helping in reduction of value addition to those goods.

Creating a balance: As poor people spend more on consumption than richer ones, an increase in taxes on consumption would aggravate both vertical and horizontal inequality. For this very reason, there was a proposal to exempt 100 essential items of daily use. There was an expectation that states, where products are consumed, will benefit from these exemptions compared to states which supply and manufacture. It was also expected that it would help create a better socio-economic impact. 

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Evasion of Taxes: As GST will have a complete record of any item from its origin to the end-user, the IT department can track all the transactions. It leaves little to no scope for fraud or the use of domestic black money. Hence it was expected that there would be a decrease in tax evasion. 

GST Partially Met Expectations: There have been significant changes in the speed of supply. Time is taken for a truck to transport goods from one state to another, reduced to about 20%. It had a significant effect on the ease of doing business and helped create more revenue for companies. GST met expectations in this step. The exemption of items under GST cannot avail Input Tax Credit, and because of this demand for larger companies increased from where suppliers were able to avail input tax credit. It created a negative effect on small firms dealing with exempted items. GST met expectations partially here because the advantage to consumers was positive, but there was a disadvantage to the small supplier. Building a framework that has a record of every stage of supply through invoicing did help curb tax evasion. Still, in real estate, there was a lot of wrong-invoicing, prices of transfer and other such transactions that kept the real estate sector out of the grip of GST.

Conclusion

The advantages of GST were not visible in the first year and a half, but later on, the benefits to the economy started to get more clear. It took a while for the GST regime to meet the initial expectations. Still, with revisions by the GST council about the different aspects of GST like the tax rates, scheme, filing of returns, etc. it became efficient. It started to meet expectations creating a positive impact. GST in India remains a complex tax system, but it has evolved a great deal since its initial implementation in July of 2017.