Economic Survey II: GST has hidden benefits, but needs to be more inclusive

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The second volume of the Economic Survey tabled in Parliament on Friday sought to allay concerns that the goods and services tax (GST) was complex while enumerating its ‘hidden benefits’ on the economy as a whole. Additionally, the survey said it was a challenge for the GST Council in the months ahead to ensure that sectors currently outside the ambit of the new indirect tax regime are brought in for a better GST.

The survey prepared by finance ministry economists said that it was inaccurate to compare current GST with an ideal GST, and it should be compared with the previous system of taxation. Further, it said that relative to the past, there was now uniformity and considerably less complexity to the tax system as three-four state VAT rates, varying across states, and 8-10 excise rates had been reduced to six rates under GST.

Although the survey said that taxpayers dealing in goods were less burdened under GST, it admitted that the compliance burden for service providers will increase substantially as they would be required to register in every state of business unlike a central registration earlier. “States were nearly unanimous in insisting for multiple registration as a way to ensure that they receive their due share of revenues,” the survey said on the decision of the council.

It cited a higher exemption ceiling of Rs 20 lakh annual revenue and composition scheme as beneficial to small traders. “As a result, out of about 87 lakh agents that were previously in the tax net (states VAT, central excise and service tax) about 70 lakh remain in the GST net. A significant number of small traders with turnover less than 20 lakh may have opted out,” the survey said.

Among the hidden benefits of GST, the survey said bringing the entire textile sector and works contracts under the tax net meant that previously partially-taxed sectors — fabrics and real estate — would be formalised leading to transparency and prevent evasion. “The formalisation will occur because builders will need documentation of these input (cement and steel) purchases to claim tax credit,” it said.

Further, GST will remove gaps in the duty structure on imports leading to effective taxation. For example, the SAD was levied at 4%, even though the standard VAT was 12.5% in most states; while in principle firms that paid VAT on inputs could reclaim the tax, in practice there were difficulties getting the tax credits, the survey said and added it would now be rectified.

Additionally, the survey listed benefits such as expansion of tax base — with nearly 12 lakh new registrations till August 5 — more efficient transportation with removal of check-posts at state borders and possible increase in direct tax collections with the availability of common set of data on taxpayers to both states and centre.

“The longer-term benefits include the GST’s impact on financial inclusion. Small businesses can build up a real-time track record of tax payments digitally, and this can be used by lending institutions for credit rating and lending purposes,” the survey said and added that currently small businesses were credit-constrained because they cannot credibly demonstrate their financial capability.

In the months ahead, the GST Council will be faced with many challenges to make the current GST a better system. The survey cited the need to include land and real estate and alcohol in the GST to improve transparency and reduce corruption. Bringing electricity under the GST framework to improve competitiveness of Indian industry because taxes on power get embedded in manufacturers’ costs, and can be claimed back as input tax credit, the survey said.

It also batted for higher GST on jewellery products than the current rate of 3% as these items are disproportionately used by the rich, the survey argued. Extending the same logic, it said that keeping health and education completely out was inconsistent with equity because these are services consumed disproportionately by the rich.

Although the survey condoned the multiplicity of rates saying it was needed to keep rates down for essential items consumed by the poor, the rationalisation of rates would pose another challenge to the council.

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