GST at an inflection point, effortsmust be made to fine-tune structure

India’s biggest tax reform is working, but it could do a lot better with more tweaks

It is only a matter of time before the disruptions and loss of revenue from the implementation of Goods and Services Tax (GST) give way to efficiency and compliance gains.

It will happen as economic growth accelerates and systemic bugs get fixed, and, importantly, the government continues fine-tuning the GST structure.

Increased costs

The disruptions caused increased both the compliance cost for tax payers and administrative costs for the government. Inability to process refunds of exporters hurt their short-term prospects, particularly in labour-intensive sectors like textiles and leather. The roll out of the technology platform, the Goods and Services Tax Network (GSTN), was also not smooth.

But the government was quick to make amends, including paring rates.

As the slip-ups get systematically eliminated, tax revenue as well as transparency will increase. Reason, why GST revenue can only improve in the medium term?

There have also been other positive fallouts of GST.

The Economic Survey 2018 reported that the number of indirect tax payers has gone up by 50 per cent and direct taxpayers, by 1.8 million, after demonetisation and GST.

In addition, GST will help formalise the economy and have a positive spill over effect on income tax compliance.

Global experience tells us that the introduction of GST raises the spectre of inflation as tax rates undergo changes.

Since the pass-through is often asymmetric — producers are quick to pass on tax increases to consumers, but tend to hold on to gains from tax cuts — inflation tends to rise. But this did not happen in India for two reasons: food inflation came down sharply, and the cuts in GST rates on some of the items brought prices down.

There is also some evidence of improvement in personal income tax compliance.

Number of filers up

The number of income-tax filers has notably improved, which has lifted direct tax buoyancy (or the percentage point increase in tax collection for every percentage point increase in GDP) to 1.9 in fiscal 2018 from 0.6 in fiscal 2016.

That was clearly on account of better compliance on the personal income tax front, as corporate tax collections have been sluggish. Rates need to be brought down, exemptions trimmed for corporate taxes as was promised by the Narendra Modi government in its maiden Budget.

To sum, a simple and efficient tax system is critical for improving tax buoyancy.

For achieving that, efforts must go in the direction of further streamlining the tax structure.

GST’s unfinished agenda includes bringing items such as petroleum products into its fold, streamlining in certain sectors like real estate etc.

Source- Business Line.

The post GST at an inflection point, effortsmust be made to fine-tune structure appeared first on GST Station.



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