Has GST Met the Expectations and Contributed to the Good of The Indian Economy?

On 17th July 2017, Goods and Services Tax (GST) was implemented in India. Many hailed it, and Many criticized it. It was called the second milestone in the country’s history since independence. The effects of GST on real estate, manufacturing, trade, supply, transport, or other forms of business of every sector were going to be significant.

GST was a big deal because it would bring a complete change to the tax system, and the repercussions could make or break the economy. Since the introduction, there were issues with the Act. Some felt that the Act was implemented in a hurried manner, and it needed changes. Some claimed that the GST portal is not fully equipped to meet the demands to handle all aspects of tax payments or filing returns.

There have been some immediate tweaks that were made after the implementation of the bill, and there are still some amendments that take place every now and then. There have been continuous changes made to the Act since its inception. The GST latest news shows that there were some amendments made in this year’s budget to accommodate the previous shortcomings in the Act. The core of GST remains the same from the time of its inception, but there have been some amendments made to make it even better.

Expectations when GST was first introduced.

Before the GST was introduced, the tax system was not centralized. One of the reasons why GST was needed was because of the indirect tax structure. Under indirect tax structure, complex multiple taxes raised the cost of compliance. The cascading effects of taxes or the “Tax on tax” structure made it expensive for traders on every level. From manufacturer to retailer, every supply point had to pay tax on tax. The Indian market was fragmented by tax barriers.

Initially, the GST council finalized on a four-tier tax structure. 5%,12%,18% and 28%. The highest percentage of tax was levied on luxury and de-merit goods like high-end cars, SUVs, and tobacco products that would also attract an additional cess. The cess was expected to provide additional resources to the government to compensate states for losses incurred. With a view to keep inflation under control, essential items like food, which constituted nearly half of the consumer inflation basket, were taxed at zero rates. GST was to be based on a compensation formula. Some of the important expectations from GST were also seen as a change to bring a favorable outcome for the economy.

The main expectations when GST was to be introduced were:

  • Removal of cascading effect embedded in the cost of production of goods and services, which would significantly reduce the cost of indigenous goods, creating better trading opportunities.
  • Ease of doing business would become prevalent. Integration of multiple taxes into one single tax – GST – would reduce the cost of transaction and tax compliance.
  • GST was also expected to create more job opportunities by creating a transparent, stable, and predictable tax regime that would encourage local and foreign investments in India.
  • Removing tax barriers with seamless credit making India a common market leading to efficiency in supply chain and scale in production.
  • There was a very strong expectation that GST would help curb corruption. Through its new structure, the government would be able to keep a check on all activities relating to the supply of goods and services.
  • Transparency of honest trade was expected to increase significantly, leading to better tax collection and curbing dishonest practices creating a healthy market for investments and trade.
  • GST being monitored jointly by Central and State Governments, It was expected to have tighter control over frauds and tax evasions that could happen within and outside the control of tax officers and other related officials.
  • GST was expected to bring in the unorganized sector into the fold of the organized sector. Because GST would have a record of every level of the supply chain, unorganized businesses would have no option other than to get themselves registered to do business. This will help the economy get better by stopping the non-payment of taxes.
  • It was expected that there would be substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated by having a long value chain from manufacturing to the consumption of goods.
  • It was expected that the telecom sector would have a slightly higher service tax of 18% from the previous 15% service tax.

Expectations after GST was first introduced:

  • In the initial days of the introduction of GST, government expectations for the tax-to-GDP ratio were to reach 12% by the financial year 2020.
  • It was expected to bring down fiscal deficit to a substantial 3% of GDP by the year 2020.
  • It was expected to bring down revenue deficit to 1.4% of GDP by the financial year 2020.
  • The medium-term expenditure framework that was released by the government should tax-to-GDP ratio rising 30 basis points each in the financial year 2019 and 2020 to 11.6% and 11.9%, respectively.
  • With the introduction of the GST, the government expected any shocks to the tax collections that may arise, would be absorbed in the fiscal year 2017-18.
  • Higher taxes were expected, which could be spent on the creation of capital assets. The share of capital spending in total spending of Rs 26 lakh crore in the financial year 2020 was expected to rise to 15%. This was when total spending was at 14.4% of 23.4 lakh crore in the financial year 2018.
  • Tax revenues were expected to surge and help spending on centrally sponsored welfare schemes by up to 23.6% about 5.67 lakh crore in the financial year 2020.