[dropcap]T[/dropcap]he Indian economy, since independence, has been petrified of inflation and has been facing a capital crunch. Attracting investments to India became paramount in the 21st Century but a complicated tax regime deterred investors from coming here. This multi-layered tax structure also contributed to a rise in inflation, for which Atal Bihari Vajpayee, in 2000, recommended the idea of adopting Goods and Services Tax (GST). But successive governments took 17 years to finally adopt and implement GST on July 1, 2017.
After one year of being in force, it makes sense to analyse who has benefited more, the government or the people.
In order to assess who has profited more, what needs to be examined is the intent of the government in bringing about this indirect tax reform. Simply put, the purpose of GST was to offer a more simplified indirect tax regime, lower compliance cost, formalise business activity in the country without raising taxes, especially on products and services of daily needs, so that India could be promoted as one unified market for global investors.
In an interview with F&D’s Chris Wellisz, Arvind Subramanian who as chief economic advisor to the government of India, starting 2014, said recently, “There has been an almost 50 per cent increase in the number of registered GST taxpayers. We are going to see an increase in taxpayer registration, which will lead to better compliance over time. Our conservative estimate is that once it stabilises, we should get another 1 to 1.5 per cent of GDP extra revenue from the GST.” Clearly, the revenue collection for the Centre and the state government is on the rise which is a good news for the government.
However, inflation, which directly impacts the consumers, seems to have shown no positive turn after GST was implemented.
As it can be seen in the graph (rise & fall in India’s annual inflation rate), inflation, though in check, has only risen after GST was implemented. It means that despite the GST, there is compliance cost added onto the final product and services, among other factors including rising petrol and diesel prices, which can come down if the procedures and systems are streamlined.
The impact of declining FDI on people
As RBI is still not confident on inflation, although it is under control, it has raised its benchmark policy repo rate by 25bps to 6.25 percent on June 6th 2018, while markets expected no changes.
It is the first hike in borrowing costs since January of 2014 which means that the cost of capital will go up to impact the overall prices further which is not a good news for the people at large.
Dip in investments followed by a hike in interest rates will adversely impact the primary, secondary and tertiary sectors. This will affect employment rate, demand for products & services and thus people will suffer in the immediate term.
The Indian economy, since independence, has been petrified of inflation and has been facing a capital crunch. Attracting investments to India became paramount in the 21st Century but a complicated tax regime deterred investors from coming here. This multi-layered tax structure also contributed to a rise in inflation, for which Atal Bihari Vajpayee, in 2000, recommended the idea of adopting Goods and Services Tax (GST). But successive governments took 17 years to finally adopt and implement GST on July 1, 2017.
Today, after one year of being in force, it makes sense to analyse who has benefited more, the government or the people.
FDI has declined
As mentioned already, one of the major intents behind implementing GST in India was to attract more investments. The data of monthly inflow of foreign direct investments (FDI) from July 2017 to April 2018 shows that the FDI has actually come down.
However, GST alone could not be held responsible as, fortunately, for the Modi government, greenfield capital investment globally decreased by 15.2% to $662.6bn, while the number of FDI projects declined by 1.1% to 13,200 in 2017, says FDI report 2018. Interestingly, AT Kearney report on FDI is suggesting that ‘the tide of global capital has been turning and India finds itself on the wrong side. Overall, global capital is moving towards bigger and more developed economies’.
“This growth is likely a result of stronger economic performance across developed market economies, their competitive advantages in technological innovation, and the regulatory and competitive pressures to localise operations in core markets,” the report said. The report also says, “Some policies in India, however, may have deterred investors at least in the short term. The 2017 nationwide goods and services tax (GST), for example, has faced implementation challenges, and the 2016 demonetisation initiative disrupted business activity and weighed on economic growth”.
In a field study conducted by researchers from OP Jindal Global University, it was found that businesses that sold to end-consumers, have continued to sell their products in the informal market.
It was expected that the informal sector will come under the regulatory framework, and pay taxes. The anticipation was that businesses that do not adapt to GST will ultimately shutdown ending the informal sector.
20% of the total businesses showed a partial shift to the formal sector. Majority of this shift towards formalisation was seen in the restaurant industry.
Discontentment rose amongst businesses which adopted GST due to frequently-changing tax rates, crashing website and frequent tax-returns.
Improvements may be deferred
The government has announced, on Thursday, that the next meeting of GST council will be held on July 21. Considering that the current year is also the last year of the government in the Centre, it can not be ruled out that concessions will have to be made or that improvements to the GST will have to be postponed.
Also, the World Bank, in its biannual India Development Update report, has acknowledged that ‘having six different rates – 5, 12, 18 and 28 per cent apart from some items being taxed at zero per cent and gold at 3% – makes India’s GST one of the most complex in the world. To make things worse, petroleum products, power and real estate have been kept outside the GST ambit’.
It is to be seen whether the complex indirect tax structure in India will be simplified without bowing down to populism or whether the structure will become more complex. The government has hardly changed as far as efficiency of its use of public money is concerned. Without reforming itself, initiating reforms impacting the people has never been a good idea. The GST has certainly enhanced revenue collection but no one is sure if this revenue will reach the last man via services.