Management Perspectives

One of the announcements, by the Honorable Finance Minister, Smt. Nirmala Sitharaman, during her Budget 2022 speech, that brought cheer all around, was about the Goods and Services Tax (GST) collections during January ’22, which set a new record of over Rs. 1.4 lakh crore.

Bringing in GST from July 1, 2017 is, arguably, the best structural reform introduced by the Modi government. Not only has it replaced a plethora of indirect taxes like the Excise Duty, VAT, Service Tax, etc., it has also relieved everyone from the harassment of Central Sales Tax, inter-state sales tax, different sales taxes on the same product in different states, multipoint sales tax, entry tax, octroi duty, and other such legacies of the colonial times. Indian business and industry would be justified in referring to time spans as pre- and post-GST.

Perhaps the biggest benefit to the exchequer is the unravelling of revenue leakages at many levels—trucks full of goods leaving factories without paying excise duty and even crossing state borders with a little bit of cash changing hands at each point was a common practice in the pre-GST era. GST is opening up hitherto unknown audit trails. Continuous rise in collections is a proof of gains already garnered by governments—both Central and State.

GST is actually still a ‘work in progress’ and one cannot even fathom the potential of this instrument and the enormous amounts it can bring into the government’s coffers; how it can empower the government to provide a decent social security umbrella for the people as also spend more on the much needed infrastructure all over the country; and trigger huge investments by the private sector.

GST alone has the potential to put us on the quick growth path by plugging leakages and reducing tax evasion. Everyone knows that the size of ‘informal economy’ in our country is probably bigger than, or at least equal to, that of the formal one. GST can help the country expose such ‘below the tax radar’ businesses and give a big boost to the economy.

The monumental reform was not easy to introduce. It had been on the anvil for a long time before the GST Council—with the union finance minister (FM) as chairman and FMs of all states as members—was set up. It was in the year 2000 that the idea of adopting GST was first mooted by the Vajpayee government. FMs of the states formed an ‘empowered committee’ (EC) to create a structure for GST based on their experience in designing State VAT. Asim Dasgupta, Finance Minister of West Bengal, and founder Chairman of the EC, worked on this for many years; he was succeeded by Sushil Modi of Bihar, then Abdul Rahim of J&K, followed by K M Mani of Kerala, and finally Amit Mitra (the former, legendary Secretary General of FICCI) from West Bengal. A great tradition to note here is that all the chairmen of EC have come from opposition-ruled states that makes the body a truly democratic one even though the Council is chaired by the Union FM.

It was only on September 8, 2016 that the constitutional amendment bill for bringing in GST was approved, and finally, the system was introduced from July 2017. It is pertinent to mention here that France, the first country in the world to introduce GST, did so in 1954. Now, of course, many countries—including UK, Canada, Australia, Spain, Italy, South Korea, and Singapore—have adopted the system. Meetings of the GST Council are held regularly to review the rules and rates—as many as 46 have been held in less than five years—and the decision making process is quite complex because states with different ideologies, many diametrically opposite that of the center, passionately discuss the issues and the Union FM is often not able to bring about a consensus and push changes. Everyone is aware that our GST rates are perhaps the highest in the world and also several crucial items are still outside its ambit, but, as I have mentioned earlier, it is still “a work in progress” and we need few more years before it matures.

According to various studies, we have enough headroom to increase our tax collections under GST. Average total tax collections in OECD countries is a whopping 34 per cent of their GDP. In our case, we should see a ratio of about 12 per cent for FY 21-22. Whereas we may never reach the dizzying heights of OECD, there is enough room to move up—perhaps inch up to 20 per cent in a few years. GST collections are having an impact on direct tax collections too. Our GST rates will of course have to go down gradually, also everything has to come under GST and so the collections will almost certainly keep increasing because more and more manufacturers and traders will go ‘straight’ and comply. There are two issues at the core of this exercise. First- making our audit trails more precise and sophisticated. The modalities of GST, if followed strictly, leave very little room for evasion and even avoidance of tax.

Since GST is being collected mostly at the point of final sale every link in the value chain is open to scrutiny; everyone is keen to ensure their input credits for what they have paid for their purchases of raw materials, parts, packing material, services, et al. If the audit trails are scrutinised meticulously and the big data thus mined is systematically analysed by our savvy techies, there is literally no scope for manipulation by the traders and small manufacturers—usually the more vulnerable points in the process. Data mining and analytics have to be developed into a sharp science by roping in experts from the industry.

Secondly, at some stage, government has to bite the bullet, shun political patronage and bring agriculture into the tax net. If the handsome increase in tax collections has happened despite the dreaded Covid-19, one can hope for better things in future. I feel that the robust acceptability of GST, as well as other steps for improving ‘ease of doing business’ has also had a salutary effect on the FDI inflows. The recent announcement of the mega 24MTPA steel plant in Odisha under a JV between Arcellor Mittal and Nippon Steel—the world’s largest and second largest steel producers—heathy global interest in our semiconductor plans, rapid funding of our startups, and funding of other projects definitely have a connection with the onset of the GST era and acceleration in collections. Everyone appreciates ‘system improvements’ in the country where they are contemplating investments.

As per a recent press report (mid-February ’22) about Rs. 32,310 crores worth of fake transactions having been detected, in Gujarat. This is a sad reflection on our corrupt practices. However, on the flip side, it also indicates the vast scope of businesses that possibly manage to avoid payment of taxes legitimately due to the government. These scamsters have obviously got away with illegal ‘input credits’ but, I am sure, the intensified efforts by the State GST officials will not only book them and recover the money but this will also lead them to many new audit trails and new sources of tax collection. Possibly there are loopholes in the policy and procedures of the GST regime, which need to be watched continuously and set right to ensure such leakages do not take place in future.

As I have mentioned earlier, valuable data collected from the GST audit trails is also of great help in augmenting our direct tax collections. Possibility of a strong scrutiny of the trails ensures that tax payers become more careful about what they are offering for income taxes. Indeed, an ET report (March 18) mentioned about the ‘Direct Tax Collections for FY22 having already reached almost Rs. 14 lakh crores’ which is an almost 50 per cent growth over the previous year. Even the advance tax deposits for the same FY have shown an increase of over 40%. All these figures, on one hand, show a strong economic recovery but also underline the fallout from the growth of GST collections and its salutary effect on direct taxes.

Let me also mention here that USA, the largest economy in the world, does not follow the GST system. In fact, there are major structural differences between the system followed in most OECD countries vis-à-vis USA. They put much greater emphasis on individual income taxes as compared with the OECD nations. Last year individual taxes constituted 41 per cent of their total tax collections in the US whereas this figure was just 24 per cent in OECD. One of the reasons for this is that more than half of the business income in the US is reported in individual tax returns. According to the US law makers, their different approach to taxing business boosts the share of tax revenue from individuals. Also, their reliance on consumption tax Is much less. In the same year their share of taxes on goods and services was a mere 17 per cent of the total tax revenue as against a whopping 32 per cent for OECD. Whereas I am not clear about the reasons for this deviation and relative merits of the two systems, I believe that their more robust federal system—with the states having considerably greater powers—has never permitted any federal government to even contemplate introducing a single central system like the GST. I have also noted that States and local bodies in the US collect nearly half of the total tax revenue in that country.

Hopefully, increasing coverage of vaccinations will ensure that we can go back to a near normal working of industry and commerce. After all, scientific advice continues to remind us that way to arrest the pandemic is through vaccination and appropriate protocols like wearing of mask, social distancing, and personal hygiene, and not lockdowns and shutting down factories. Such a situation should further improve the economic activity and give a phillip to the GST collections. My gut feeling is that the present annual collection of, say, Rs. 15 lakh crore have the potential to rise to as much as Rs.30 to Rs.50 lakh crore.