New Delhi: The government on Monday celebrated two years of the GST regime in the country, which, until its implementation, was touted as the harbinger of economic growth. Many economists, industry experts as well as government officials had argued that a centralised tax regime will push India’s GDP growth by 1-2%.
While the country’s GDP growth has moved in the opposite direction ever since the implementation of the GST, one would still believe that an effective GST system can improve tax collection rate and help indirectly push India’s growth rate eventually.
But for that to happen, the government needs to understand that whatever be the tax regime in the country, it should not be difficult to comply with. Over the last two years, one lesson that has come out to the fore is the excessively difficult process of tax filing, even after all the changes done by the government in different tranches.
Another fact that the government should have learnt is that GST has made the survival of small businesses difficult. It’s important to understand that small businesses generate a significant number of employment opportunities and even if they do not contribute to government’s tax kitty directly, every product consumed by those employed in small businesses contributes to government coffers by way of consumption and the tax paid on it. The cost of computers and the need to hire professional accountants have made small businesses unprofitable. The government must find a way to keep them out of the GST regime.
Another problem that the GST regime has given birth to is the surge of fake invoice generating companies. These companies are luring small and medium businesses into unethical practice of purchasing fake invoices to save taxes.
The government has managed to bust many such rackets across Gujarat and Maharashtra over the past two years, and the statement by Minister of State for Finance Anurag Thakur on the eve of the second anniversary of GST suggests that the government will continue to tighten the noose around such rackets. But, it is important to understand that a crime can only be controlled by controlling the incentives for the crime. And in the current system, the incentive for generating fake invoices is higher than the cost of getting caught.
Another lesson, and perhaps the most significant one, is that the idea of bringing in four tax slabs has only contributed to muted growth in revenue. While the government requires year on year growth rate of 25% in terms of GST revenue, the actual growth rate has been just 15% over the last two years.
Former finance minister Arun Jaitley, in his blog written on the eve of the second anniversary of GST, has talked about a two-tier tax regime that’ll be possible with the merger of 12% and 18 % rate slabs. But he hasn’t suggested an exact timeline for the same.
The problems with lower revenue growth must be seen in the context of lack of demand in the Indian economy. If the government dares to announce just two tax rates in the GST regime with immediate effect by doing away with 28% tax rate, it may effectively give the much-needed stimulus to the country’s economy.
One can’t disagree with the former finance minister’s argument that ‘Hawai Chappal’ (slippers) and Mercedes can’t be taxed at the same rate, but it’s difficult to believe that India aspires to grow in double digits on the demand boom from the middle class by putting cars and consumer durables in the highest slab of 28%.
Surely, it’s a long road ahead for the government in making the GST a success that it was envisaged to be. The sooner the learnings from the last two years are turned into policy measures, the better it would be for the country’s economy which last reported a growth rate of just 5.8% in the quarter ending March 2019.