Transformation vs disruption

The rollout of the Goods and Services Tax (GST) has been one of the boldest decisions of the Modi government in the last four years towards reforming the country’s archaic indirect tax system.

This could be followed by demonetisation and overhaul of bilateral tax treaties with tax havens like Mauritius and Switzerland aimed at helping the government smoke out billions of dollars of black money stashed abroad. While these actions have definitely brought structural change in the system, business sentiment has, for most of the Modi government’s term, been negative with revival signs visible only now.


Structural reform

“The most important structural reform has been GST which was in the works for 11 years and got implemented. The implementation has not been as one would have desired but issues pertaining to rates and technology seem to have settled now. Another aspect the government has been very conscious of is cutting down on litigation. This has been very positive,” said Dinesh Kanabar, chief executive officer at tax advisory firm Druva Advisors.

He was, however, quick to point out the negatives as well and said that tax officers’ mindset continues to be target-oriented and hence they continuously look for ways and means of raising revenue whether it is justifiable or not. While GST is counted as a transformative step of the government, it is demonetisation which is considered the boldest even as critics have termed it as monumental disaster and an unplanned exercise. It has been one of the most debated issues in recent times and would continue to generate divergent views. Debates aside on its efficacy and whether it achieved the desired objectives, demonetisation has surely helped widen the tax base. After note-ban in November 2016, 1.01 crore filers were added compared to an average of 62 lakh in the preceding six years.

“The demonetisation of high value currency has reduced the quantum of cash currency and circulation in India. It has increased the taxation base and spurred greater digitisation of the economy,” Union finance minister Arun Jaitley said while presenting Budget 2018.


Experts are unanimous on GST and demonetisation together formalising the economy and improving tax compliance. They have given the thumbs-up to most government initiatives on the tax front and think they are well on course. Research and rating firm Crisil in a report on the Modi government’s four years said that implementation of GST is expected to speed up the formalisation of the economy, thereby improving tax compliance over the medium term. Further, the demonetisation shock despite its adverse impact on economic activity has been synchronous with improved tax buoyancy.

According to the Economic Survey, 2018, India’s indirect taxpayer base increased by more than 50 per cent with the implementation of GST, with 34 lakh new entrants, over and above the 64 lakh old registrants. Neha Malhotra, executive director, Nangia & Co said GST is a cure for ills of the earlier tax regime. “It is a comprehensive tax structure which will ensure both the removal of cascading effect of taxes and a continuous chain of credit right from the producers’ point up to the consumers’ point, taxing only the value added at each stage,” she said.

On direct tax front, she applauded the government for bringing the concept of e-assessments, introducing presumptive taxation for professionals and simplifying the income tax return (ITR) forms. Further, GAAR has also been a major implementation of the NDA government to expand the tax base. Reduction of tax rates for small companies, promotion of start-ups, incentives to industrial and service sector including foreign entities are other key measures to make India more investor-friendly.

But both the key reforms of GST and note ban have, however, been big disruptors also slowing down economic growth, albeit briefly. As they had an adverse impact, especially on the informal sector and resulted in job losses, there could be a price to pay in the next Lok Sabha elections.

Nirbhay Kumar