VOLUME I CHAPTER -2
A NEW, EXCITING BIRD’S –EYE VIEW OF THE INDIAN ECONOMY THROUGH THE GST INTRODUCTION:
This chapter provides an understanding of outcomes of GST through various perspectives-taxpayers, tax base and its spatial distribution etc. The chapter gives a hint of the insights that analysis of the GST will be able to provide in the future.
GST has been widely heralded for many things – potential to create one Indian market, expand the tax base, foster cooperative federalism and creating a vast repository of information
, which will enlarge and surely alter understanding of India’s economy. Exciting new findings include
2. TAX BASE AND ITS SPATIAL DISTRIBUTION:
- There has been a 50% increase in the number of indirect taxpayers (a substantial 3.4 Million)
- Voluntary compliance: many have voluntarily chosen to be part of the GST, especially small enterprises that buy from large enterprises and want to avail themselves of input tax credits.
- Composition scheme: Taxpayers (with turnover less than 1.5 crore) registered under this scheme pay a small tax (1%, 2% or 5%) on their turnover. It reduces administrative burden of taxpayers but makes it difficult for them to sell to larger firms as they are not eligible for input tax credits. Thus, more than 3% of those eligible to register under the composition scheme, chose instead to be regular filers.
- Majority of new filers in Indirect Tax regime are business to business and export oriented companies (30-34%)
- States with the greatest number of GST registrants: Maharashtra, UP, Tamil Nadu and Gujarat. UP and West Bengal have seen large increases in the number of tax registrants compared to the old tax regime.
3. SIZE DISTRIBUTION OF INTER-FIRM TRANSACTIONS
- The distribution of the GST base among the states is closely linked to their Gross State Domestic Product (GSDP), allaying fears of major producing states that the shift to the new system would undermine their tax collections as GST is a destination and consumption based tax.
- Though manufacturing states’ (Gujarat and Maharashtra) tax base under the GST is lower than their share of manufacturing, but they also have a presence in services, so their tax base share remains in line with their share of GSDP suggesting fairness and balance in the GST outcomes.
- Each state’s share in the tax base is almost perfectly correlated with its share in GSDP.
- REVENUE NEUTRAL RATE – it is the tax rate that allows the government to receive the same amount of money despite changes in tax laws.
- that single rate, which preserves revenue at desired (current) levels.
- RNR should be distinguished from the “standard” rate defined as that rate in a GST regime which is applied to all goods and services whose taxation is not explicitly specified.
- as estimated by the RNR committee, the single tax rate that would preserve revenue neutrality is between 15 to 16 percent.
- Skewed distribution of turnover: The registered below-threshold firms account for 32 percent of total firms but less than 1 percent of total turnover, while the largest account for less than 1 percent of firms but 66 percent of turnover, and 54 percent of total tax liability.
|Category of firms||Annual Turnover (in Rs.)|
|Below Threshold||< 20 lakhs|
|Below Composition limit||20-100 lakhs (now 150 lakhs)|
- Registered smaller firms (the first three categories) seem to be equally involved in selling to consumers (B2C) and selling to other firms (B2B). Medium and large firms, in contrast, have a much greater presence in B2B than B2C transactions.
- Small B2C firms want to be part of the GST because they buy from large enterprises (68% from medium and large) giving them an incentive to register so that input tax credit on such purchases can be obtained.
4. INTERNATIONAL TRADE, INTERSTATE TRADE AND ECONOMIC PROSPERITY
- Data on the international exports of states (the first in India’s history) suggested prosperity related to export performance – a state’s GSDP per capita is highly correlated with its export share in GSDP (Kerala being an outlier as it is a large recipient of remittances).
- India’s internal trade in goods and services is 60% of GDP, a relatively high number compared to other countries.
- Data on inter-state trade :
| Description||States |
|Largest exporting states (about 70% of total)||Maharashtra, Gujarat, Haryana, Tamil Nadu, Karnataka;|
|Largest importing states||Maharashtra, Tamil Nadu, UP, Karnataka, Gujarat;|
|Largest internal trade surplus||Gujarat, Haryana, Maharashtra, Odisha, Tamil Nadu.|
- Two important observations:
- The states that export the most are also the ones that import the most.
- The states that trade the most are the ones that are the most competitive and run the largest trade surpluses.
- The correlation of per capita GSDP with international exports is stronger than with inter-state trade.
5. TRADING SUPERSTARS: INDIAN EXPORT EGALITARIAN EXCEPTIONALISM:
- Exports superstars—firms that account for a disproportionately large share of exports. But India is an exception with an egalitarian export structure.
- Export concentration by firms is much lower in India than in other advanced economies.
|Share of exports ||India||Major countries |
- The possible reason could be that unlike in other countries, Indian data includes exports of services, where concentration ratios in top firms tend to be much lower than in manufacturing.
- Egalitarian export structure has:
– expansion has spillover effects on other firms and they are dynamicDisadvantages
– impede competition 6. INFORMALITY OF THE INDIAN ECONOMY:
- Major findings related to size of formal and informal sector –
|% of firms||Social security net||Tax net|
|87 (purely informal)||No||No|
- India’s formal sector non-farm payroll is substantially greater than currently believed. Its estimate is ranging from 31% in the case of social security-defined formality and 53% in case of tax-defined formality