After considerable effort by the Goods and Services Tax (GST) council, GST has been ushered into India from 1 July 2017. At the time of writing this chapter, GST has been in operation for over 12 months. The new regime has faced a number of hurdles and has therefore needed some significant changes, spanning changes in rates of tax, changes in the forms and procedures for filing returns and introduction of new compliance-related features like the issue of an e-way bill for the transport of goods from one location to another. This chapter is an attempt to assess the performance of the GST regime in this one year. The economy has been subject to two major shocks in the past two years – the withdrawal of high value currency notes, otherwise referred to demonetisation, and the introduction of GST. Since it is rather early as well as technically difficult to disentangle the effects of these two effects on the economy, in the section titled ‘Likely Impact of GST’, an attempt is made to identify the kinds of effects change in the indirect tax regime could have on the economy. This is followed by a discussion on the impact of GST on revenues of union and state governments (section titled ‘Revenue Performance Under GST’). Finally, with GST bringing with itself a substantially different administration and compliance regime, the final section looks at some of the issues emerging out of the compliance framework for GST. Before exploring these issues, presented below is a brief summary of the key features of the GST regime in place today.

The key features of the GST regime implemented in the country on 1 July 2017 can be summarised as follows:

The goods and services tax (GST) has been presented as the major tax reform for the Indian economy. It is therefore of importance to examine the impact it has had on the economy, as well as on the citizens of the economy. There are three broad categories of evidence to look at:

The impact on revenues of various governments has been examined at some length in Chapter 9. Hence this chapter will look into some of the remaining aspects and present some concluding observations.

Impact of GST on Economic Growth and Inflation

One of the long-term objectives of introducing GST is that it will reduce the extent of hidden and embedded taxes in the system and thereby create opportunities for investment in order to capitalise on the altered tax regime. The change to GST as a predominant indirect tax was expected to increase gross domestic product (GDP) and reduce inflation. International experience shows that GDP growth falls after introduction of GST but it recovers after two—three quarters and, conversely, inflation rises in the initial quarters before it declines (The Treasury, Australian Government 2003). While it is barely four quarters since the introduction of GST in India and hence the evidence of the reversal of the initial trends might not be visible yet, it would be interesting to identify the trends so far.

Impact on Overall Growth

Year-to-year growth rate of gross value added (GVA) at basic prices (2011–12 series, at constant prices) shows

that growth rate was falling since Q4 of 2015–16 and it was 5.6 per cent at Q1 of 2017–18. The introduction of GST on 1 July 2017 lifts the growth rate of GVA as evident in Figure C.1. However, the average growth rate during 2017–18 (6.4 per cent) is lower than that achieved in 2015–16 (8.1 per cent) and 2016–17 (7.1 per cent). In drawing conclusions about the impact of GST on GVA from these numbers, it should be borne in mind that seven months prior to the introduction of GST, the economy received a shock in the form of withdrawal of high denomination notes.

Introduction

With some progress in the design of the Goods and Services Tax (GST), there is an emerging need to explore the options for administering the new tax regime. From the discussions and decisions taken so far, one of the important parameters of the new regime is the applicability of two taxes (Central GST, CGST, and State GST, SGST) on each and every transaction of supply of good and/or service in the country. The central tax would accrue to the central government and the state tax would accrue to the state governments. Inter-state sales and imports will attract Integrated GST (IGST) and it is likely to be administered by the central government. IGST will comprise of the prevailing SGST and CGST rates for the concerned good and it will work as a mechanism (or clearing house) to transfer input tax credits from the origin state to the destination state. Compared to the existing regime, the proposed tax represents a significant change in the tax administration. The central tax administration would need to deal with wholesale and retail traders in addition to the existing taxpayers (e.g., manufacturers, service providers). Similarly, the state tax departments would need to deal with service providers. The workload per employee as well as the skill set associated with tax administration would have to undergo a sharp change if the taxes are to be administered by maintaining a status quo on the forms of administration. In other words, grafting the new tax on to existing tax administrations would impose a significant cost of transition in addition to the higher costs of collection. On the other hand, there would be quite a sharp change in the tax environment faced by a segment of the taxpayers – all taxpayers other than the manufacturers who had faced one tax and one tax department (e.g., service providers, wholesale and retail traders). Under the new regime potentially they will face two tax departments, and potentially an increase in the compliance cost associated with the new regime, thereby raising the opportunity cost of being in the tax system. The result could either be higher evasion or higher resistance to the new tax regime.

Introduction

The purpose of this report is to generate Revenue Neutral Rates (RNR) for the Goods and Services Tax (GST) for both the Centre and each individual state using information on the contours of GST that have been decided so far in the discussions of the Union government and the Empowered Committee of State Finance Ministers. For this exercise, it is important to summarise the key features of the design of GST (section titled ‘Key Features of GST Design’). Methodology adopted to estimate RNR is presented in the next section (‘Methodology’). The section titled ‘Results’ provides the combined RNR followed by rates computed for each individual government including the Central government. In undertaking this exercise, two alternative estimates of base of services have been used – one using PROWESS data obtained from CMIE (Centre for Monitoring Indian Economy) and the other using turnover data from the Ministry of Corporate Affairs (MCA) provided by the Ministry of Finance, Government of India (GOI). It should be noted that the entire turnover of firms supplying services would not constitute additional base for GST. There are two possible reasons why the base can be different from the total turnover – one, if these firms purchase taxable goods which are used for providing these services, then they can avail of input tax credit. In other words, the turnover of these purchases needs to be deducted from the turnover of supply of services. Second, since these services in turn can be used as inputs in the supply of presently taxable goods, they would already be a part of the base for taxation of goods at present. Hence, a correction on this count too would be required to identify the extent of turnover of supply of services for final consumption. The methodology used for deriving activity code wise turnover in each of these cases is discussed in the section titled ‘Methodology’.

Key Features of GST Design

The key features on which decisions seem to have emerged on the design of GST can be summarised as follows:

1. Dual GST, a central GST and a state GST both levied on all goods and services.

Introduction

The report produced by the Ministry of Finance Committee on the Revenue Neutral Rate (RNR) and structure of rates for the Goods and Services Tax (GST) (which was headed by the Chief Economic Adviser – CEA) has given a new perspective to the discussion on the introduction of GST in India. At first glance the report suggests that GST can effectively be implemented at more reasonable rates when compared to rates being discussed in earlier press reports, without any loss of revenue to the centre or on average to the states. As is often argued, lower rates of tax are always more attractive since they would be compliance-friendly. The representatives of industry as well as the consultancy firms have pronounced that these are the correct estimates and provide a more reliable basis for introducing GST in India. Lower rates of tax are always attractive and it is the prerogative of the government to take a call on the appropriate rate at which to introduce GST. However, estimating a RNR should be viewed as an exercise to determine the rate of tax at which the government concerned can implement the new regime and obtain the same revenue as it currently does.

Any exercise to estimate the RNR would be based on assumptions other than on data which is available. There are two sets of estimates discussed in the public domain, one by the National Institute of Public Finance and Policy (NIPFP) and the other by the committee headed by the CEA (these estimates will be referred to as NIPFP and CEA estimates respectively).

As discussed in the CEA's report, the Ministry of Finance Committee's estimates have been derived by making ‘suitable corrections’ to the NIPFP estimates or the indirect tax turnover estimates as they have been referred to in the report. These two sets of estimates vary considerably and there is a need to identify the sources of difference and the rationale for such a difference. In what follows, an attempt is made to assess each of the changes proposed by the CEA's study. To begin with, a brief summary of the overall approach adopted by both these studies.

Introduction

The introduction of the goods and services tax (GST) is expected to be a major reform in the arena of domestic indirect taxes in India. While this new regime will change the tax base of both central and state taxes, the extent of its impact on the economy as well as the finances of various levels of government was not clear. The Thirteenth Finance Commission (THFC) was assigned the task of incorporating the impact of the proposed implementation of the GST into its overall recommendations. To obtain an assessment of the GST's likely impact, the THFC constituted a task force. The task force submitted its report (Finance Commission 2009a) to the THFC on 15 December 2009 and its recommendations were endorsed in the final Report of the THFC (2010–2015) (Finance Commission 2009b, subsequently Report).

The recommendations of the THFC, which says that ‘both the Centre and the States should conclude a Grand Bargain to implement the model GST’, comprise five elements.

Introduction

Various taxes, duties, levies and cesses on petroleum products and natural gas generate substantial revenues to the Central and State Governments. The tax on petroleum products and corresponding change in prices generate both direct and indirect effects across the sectors. Petroleum products directly enter as an input into a large number of economic activities (e.g., transportation, electricity generation and fertiliser production). Apart from such direct uses, there are a number of indirect uses as well; for instance, since most commodities need to be transported for use by the final consumer, petroleum products enter into the picture. Therefore, changes in prices (or taxes) of petroleum products would have significant impact on the economy both through direct and indirect or cascading routes.

The present regime of taxation of petroleum products and electricity results in cascading of taxes. Built-in invisible taxes are expected to increase prices in the domestic economy and adversely affect competitiveness of Indian exports as well. Given that the country is working towards the introduction of a comprehensive GST regime, it is an opportune moment to ask whether the proposed GST design is appropriate or whether significant degree of cascading remains. This chapter seeks to explore alternative configurations of the tax regime, with specific reference to petroleum products, and evaluate the extent of cascading under each. Given that these goods provide a major share of the revenues of the Central and State governments in indirect taxes, the comparison is attempted assuming revenue neutrality under all scenarios.

The other significant aspect of the petroleum sector is that the present administered pricing mechanism does not allow full price pass through for some refinery products (domestic LPG, PDS kerosene, diesel and petrol). This results in under-recoveries for oil marketing companies (OMCs). However, the government has not been providing full compensation to OMCs for such under-recoveries in sales of diesel and petrol. While part of the under-recovery is absorbed by the upstream oil companies, the rest remains stranded costs for the OMCs. The present system of disallowing compensation not only costs the Central Government exchequer (in terms of loss of dividend income), as most of the oil companies are under the Central Public Sector, but also provides a perverse incentive for not saving fossil fuels, thereby polluting the environment.

The objective of this book is to provide a comprehensive overview of the journey towards introduction of the goods and services tax (GST) in India. The book is based on research carried out at the National Institute of Public Finance and Policy (NIPFP), New Delhi, spanning over a decade. The basic objective of the volume is to highlight the contributions of the chapters in shaping the design and structure of the GST as well as capturing the evolution of the concept of GST in India since the late 1980s. The Indian GST is unique for its structure, design and administrative framework. The country-specific experience discussed in the chapters will help the readers to familiarise themselves with the alternative arrangements available with reference to design, structure and administration of GST from the perspective of a federal country. The concept of GST evolved over time in India and successive tax reform committees played an important role in shaping the Indian indirect tax system that finally culminated in the introduction of GST. Designing a destination-based dual value-added tax (VAT) system for a federal country like India was a challenge and from this perspective the Indian GST is unique. In this volume an attempt is made to capture the historical journey of policy research that was initiated since the inception of the government's interest in a national-level GST for India in the union budget speech of 2006–07. The introductory chapter of the book summarises the recommendations of successive tax reforms committees, constituted since Independence, with specific reference to the indirect tax regime. The recommendations contributed to a clear focus on the removal of the cascading of taxes (building up of taxes) and transition to a destination-based GST regime in India. This volume covers tax reforms carried out both in central and state indirect taxes during the last four decades and provides a background for the introduction of GST.

The chapters were written at different points in time spanning a decade and contributed to the then-ongoing discussion on GST. Each chapter of the book is based on rigorous theoretical as well as empirical research. In many countries, GST has been a tax levied by the national government.

Introduction

The quest for a suitable indirect tax framework in India encompassing goods as well as services started a long time back. The constitutional assignment of powers for taxation in India included a number of stand-alone taxes on goods and services in addition to a few relatively more broad-based taxes, none of which were comprehensive in covering both goods and services. Further, this assignment divided the powers between the union and the state governments, thereby requiring a considerable degree of cooperation and coordination between the union and the state governments in order to initiate and establish a new indirect tax regime which addressed some of the concerns emanating from the old regime. Given the constitutional assignment of taxation power to different governments, fiscal autonomy enjoyed by the subnational governments, and complexities involved in bringing consensus among the subnational governments, the evolution of the Indian goods and services tax (GST) provides an interesting example of reforms in indirect taxes for scholars interested in public finance, especially in the case of federal countries.

Reforms in indirect taxes initiated since 1986–87 helped in sequencing big tax reform such as GST in India. It helped to accommodate the political-economy dimensions as well as the acceptability aspects of the tax reform. What is significant about the Indian GST is that each and every aspect of design, structure and administration of the GST has evolved on the basis of political consensus between the union and provincial governments. For a federal country like India where subnational governments enjoy more or less a power structure similar to that of the union government and where there is considerable diversity among provincial (subnational) governments, building consensus for a destination-based dual GST system is a great achievement in the history of fiscal federalism. The role played by different institutions/committees in achieving the Indian GST requires special mention here. The present chapter is an attempt to provide readers an overview into the evolution of the concept of GST in India.

India introduced GST from 1 July 2017. It is a comprehensive multistage value-added tax (VAT) on goods as well as services and it provides concurrent taxation powers to the centre (federal) and state (provincial) governments to collect tax on every stage of value addition.