On 1 July, India made an ambitious shift to what it promised was a modern, transparent and technology-driven indirect tax system to sharpen the competitive edge of a $2.3 trillion economy riven by internal trade barriers and a raft of central, state and local taxes.
The goods and services tax (GST) was hailed as the biggest tax reform by India in 70 years of independence, a potential game changer that would, at one stroke, unite the country of 1.3 billion people into a common market by dismantling inter-state tariff barriers.
GST subsumed 17 central, state and local taxes, in line with the “one nation, one market, one tax” concept on which it was based.
The new regime had four tax slabs for goods and services—5%, 12%, 18% and 28%. Prime Minister Narendra Modi called it a “good and simple tax”, playing on the acronym.
A little less than 100 days since it kicked in, the new system is yet to settle down. While many of the lofty and intangible goals set by the government will take time to achieve, the transition has witnessed inevitable shocks.
Businesses slowed production ahead of the roll-out of GST to minimize tax complications while shifting to the new system. This in part led to economic growth in the April-june period decelerating to 5.7%, the slowest pace in three years, from 6.1% in the preceding three months.
Businesses and traders also struggled to measure up in the first two monthly tax filing cycles, making headlines about inadequate preparedness for the massive tax reform.
Going by the experience of other countries that adopted GST, some economists had predicted that the tax reform would boost India’s economic growth rate by up to two percentage points in due course as it eliminates inefficiency in the tax system.
Under GST, tax is levied only on the amount of value added at each stage in the supply chain. Businesses get a rebate for the taxes paid on raw materials and services used, which will make them more competitive as it eliminates “tax on tax”.
However, the production slowdown in the run-up to the July roll-out of the tax reform has had an adverse impact on supplies.
To be sure, many economists say the impact is temporary and that the supply chain has already started normalizing.
“The disruption caused by implementation of GST was confined to the informal sector of the economy, and it has largely bottomed out in July. Its effect will now taper off,” said Rajiv Kumar, vice-chairman of NITI Aayog, the fed- eral policy think tank.
Kumar endorsed the Asian Development Bank’s (ADB) economic growth forecast for India. ADB, which follows a calendar year, on 27 September revised its 2017 growth forecast for India to 7% from its July estimate of 7.4%, reflecting “short-term disruptions” such as last year’s demonetisation and GST roll-out that it expected to “dissipate”.
Some of the impact on the economy on account of de-stocking of goods prior to GST implementation has already started easing, said D.K. Joshi, chief economist at rating agency Crisil Ltd.
Scale of reform
“In sectors such as logistics, the benefit of GST is immediately visible in terms of efficiency, while a boost to the economic growth rate that GST is expected to fetch, is a mediumterm goal,” said Joshi.
The unprecedented nature and scale of the tax reform threw up unexpected challenges to policymakers and to the IT infrastructure.
While large businesses have their own IT systems and resources to meet the requirements of GST, the informal sector of the econ- omy, comprising small and medium enterprises (SMES), has borne the brunt of the transition impact.
GST encourages the informal part of the economy to get integrated into the formal one by way of tax rebates to registered assessees. This compels small firms to either sign up for GST or lose their competitiveness and, therefore, their clients.
Large businesses, which procure goods and services from smaller ones, are allowed to remit taxes to the government on behalf of their suppliers under what is called a “reverse charge”. But naturally, large firms would prefer to do business with registered entities.
Exporters, another affected community, many of whom are small entities, say that the deadline extensions for filing returns delay refund of taxes paid on raw materials.
Integrating the informal economy with the formal one is expected to eventually lead to a wider base not only of indirect taxes, but also of direct taxes.
Technical glitches experienced by many assessees forced the GST Council, the federal tax body led by Union finance minister Arun Jaitley, to extend various deadlines for filing summary returns as well as detailed invoice level details for the months of July and August.
Difficulties faced by businesses included tax payments not getting reflected in their wallets at the time of filing returns, absence of certain software utilities and non-responsiveness of the website of GST Network (GSTN), the IT infrastructure backing the new indirect tax regime.
The authorities said a large number of taxpayers trying to file returns on the last date has led to difficulties.
A ministerial panel led by Bihar deputy chief minister Sushil Kumar Modi has given Infosys Ltd, the company that set up the IT network for GSTN, time till October-end to fix 80% of the technical problems.
Compared with July, businesses found filing of returns and paying taxes smoother in August as GSTN focused on addressing the issue of “unanticipated user conditions”. This refers to a certain combination of factors that result in errors in rare cases.
Traders say the IT system has posed grave difficulties to them.