The midnight launch of India's biggest tax reform since independence, the Goods and Services Tax instantaneously turned India into a select league of countries with a national sales tax. The new single tax regime has now replaced an array of dozen state and central levies built up over seven decades. The GST has unified the country's $2 trillion economy and 1.3 billion people into a common market, eliminating the compounding effect of the current multi-layered tax system as well as the cross-state tax heterogeneity by fixing the final tax rate.
The initial phase before the roll-out had people, especially small traders nervous about the new tax filing system. Launched in a starry event, attendees included President Pranab Mukherjee, PM Narendra Modi, Vice-President Hamid Ansari, Lok Sabha Speaker Sumitra Mahajan and former Prime Minister HD Deva Gowda. Also present were Bollywood superstar Amitabh Bachchan, Singer Lata Mangeshkar, and industrialist Ratan Tata. The Opposition termed it a “tamasha”, saying it was being rushed in a “half-baked” manner as a “self-promotional spectacle”.
GST to be revenue-neutral in short-term
A report by Fitch Ratings said GST would support productivity and boost long-term growth prospects, however, it is unlikely to increase tax revenue in the short-term. “GST will unify the indirect tax system and remove domestic barriers to trade, which should support productivity gains and GDP growth over the long term,” Fitch said.
Fitch said a benefit of value-added taxes like GST is that retailers are required to show compliance right along the supply chain to claim refunds, adding that large companies will now have an incentive to pressurise their smaller suppliers into tax compliance. The new electronic filing system is also likely to lead to more tax reporting. “Moreover, the tax base will be broadened, as only SMEs with sales up to Rs 200,000 will now be exempt from paying GST, down from £150,000 earlier.” The report said that small informal retailers, which account for over 90 per cent of retail sales, should also find it harder to understate their sales or to avoid filing tax returns altogether in a system where transactions are tracked throughout the supply chain.
It also stated that there would be significant short-term risks involved in the GST implementation, emphasising that late changes to the GST laws and the disruptive roll-out of demonetisation. “High compliance costs for businesses and administrative difficulties have been problems in some emerging economies that have introduced value-added taxes, particularly those that had complex systems, under-resourced bureaucracies and short lead-in periods.”
