Bold GST reform in India broadens tax base but too soon to celebrate?

It’s been 5 years since India introduced the Goods and Services Tax, and while government revenues have soared, some analysts say it may be too early to celebrate.

India – Fifth largest economy in the world with more than 3 trillion dollars of GDP It has managed to double its tax base since the introduction of the Goods and Services Tax in July 2017.

While collections have increased and compliance has improved, analysts note that it does not necessarily lead to economic growth.

GST collections grew from about 7.2 trillion rupees, or $90 billion, in Fiscal Year 2017-2018 to me 14.8 trillion rupees in the fiscal year ending March 2022Government statistics show.

Although GST revenue collection is higher in absolute terms, some question whether the growth in collections will continue.

“GST cannot boost growth. Instead, growth boosts GST collection. So, future GST collection will depend on the growth performance of the Indian economy. If growth slows further, GST collection will be negatively affected,” colleague The oldest in New Delhi, the Abhijit Mokhopadhyay Research Foundation, a think-tank based, told CNBC.

“Somehow a rule of thumb has emerged that if the monthly GST package exceeds 1 trillion rupees, or $12 billion, it is successful,” he said.

Among other things, higher inflation is likely to dampen demand and lead to lower collections, Mukhopadhyay said. “The rise in the prices of goods and foodstuffs contributed significantly to the collection of the GST. If inflation continues to increase, it will eventually have a dampening effect,” he said.

The “good and simple tax”, as Modi described it, has increased the number of registered GST taxpayers to 13.6 million from about 6 million five years ago, according to figures cited by India’s Finance Minister Nirmala Sitharaman. In an article in the local media.

It has long been known that black money plays a role in India’s economic activity. In 2012, the Indian Ministry of Finance It issued a “white paper” on black money, which the government defined as “any income for which taxes imposed by the government or public authorities have not been paid”.

Former Industry Minister Katuch claims that the GST had an effect on black money.

“Where [GST] It led to the formalization of transactions that were previously of an informal nature, yes, it could have led to a decrease in black or unaccounted cash flows,” adding that it is difficult to estimate the extent of the reduction.

But not everyone agrees.

“Black money is being generated in real estate, commerce and politics. In all three cases, monetary transactions continue. Neither demonization nor tax reform has had much effect,” New Delhi-based economist Sanjaya Baru told CNBC.

The demonization refers to the controversial move by the Modi government in 2016 to withdraw large denomination banknotes as legal tender. As a way to expel black money.

The government had hoped tax reforms would increase India’s attractiveness to foreign investors, but this may not have been proven, according to Barrow, who was a media advisor to former Prime Minister Manmohan Singh.

“In theory, the Goods and Services Tax (GST) is supposed to make India more attractive to foreign investors, particularly in the manufacturing sector. [foreign direct investment] In manufacturing it was not impressive.”

The ranking of Doing Business in India by the World Bank has risen to 63rd place in 2020 From 100th place in 2017 A jump of 37 positions in a 3-year period.

While it cannot be directly attributed to India’s tax reforms, paying taxes is one of nearly ten factors used to measure the ease of doing business in the ranked countries.

“The administration’s reform efforts targeted all areas measured by Doing Business, with a focus on paying taxes, trading across borders, and resolving insolvency,” It was stated in the World Bank report for the year 2020.