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

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.

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

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.