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Will the Implementation of GST Boost Tax Collection?

It is a truth universally acknowledged by every Indian that there is an abundance of wealth running through the country, contrary to the popular belief of the rest of the world. In the eyes of the world, India is a poor developing country. The only reason this myth is prevalent is because the abundant supply of wealth is underground, unaccounted for and untaxed. If the resources of our country could be pooled, it would be enough to feed the world multiple times over. Hence, the reasoning behind the present government’s bold tactics, such as GST, which will direct more tax evaders to becoming tax paying citizens and increase tax revenue collection that could be used to develop the nation.


To understand how implementation of GST will aid in boosting tax collection we will be examining:




Pre-GST Regime

A large percentage of the retail sector in India runs informally, of which nearly 80% of the employed are non-tax payers. Before the GST era, when a trader bought goods, he/she would have to pay VAT tax, which he passed onto customers, and excise duty, which he/she would have to bear him/herself. To evade this, many traders simply did not pay excise, in this paperless, untraceable method of retailing. Moreover, it was discovered that companies were either inflating the value of their stock, to retain credit scores against loans taken or deflating the value to lower their tax liability. An unorganized system and various taxes/excise made it possible for businesses to find a way through the various loopholes and avoid taxes or lower their tax liability, an attributing factor to the country’s low GDP.


Tax Collection in GST Regime

With the introduction of GST, it will not be a situation where people are paying more taxes, but more people paying taxes, which translates to higher revenue collection due to the increase in taxpayer base. With GST taking everything to a digital platform, it will become more difficult for businesses to alter their accounts or evade taxes. As per GST laws, only SME’s whose turnover is under 20 lakhs are exempt, compared to the previous threshold of 1 crore. The new raised threshold moves many businesses into the taxable net, increasing tax revenue collected, which is evident in the taxes collected during August and October 2017 (see table below)


Table 1.0

MONTH CGST (crore) SGST (crore) IGST (crore) Compensation Cess (crore) TOTAL (crore)
August 2017 ₹14,894 ₹22,722 ₹47,469 ₹7,198 (₹599 from imports) ₹92,283
October 2017 Individual numbers not available ₹84,346

As shown, the total collection of revenue from GST is rising and the numbers reflected only portray the tax collected from 64% of taxpayers, as many have yet to comply. The variations in collections is a short term setback, which will even out in the long term, as more people comply and confusions about the process and filing get rectified.


Short Term Setbacks and Difficulties

The consensus amongst the public is that GST is a good idea and it will help in cleaning up the country. However, everyone can agree that it was unorganised, unplanned and rashly implemented without proper strategic thought. With the country still recovering from last year’s demonetisation, the method of implementation of GST was a bigger challenge. The difficulties are easily visible with the frequent amendments and updates being released pertaining to GST laws and moreover, lack of proper IT has created discrepancies and mistakes occurring during filing.


Without having a clear blueprint for a course of action, the chaos has discouraged many business owners from complying. However, as the government has been committed to tackling the problems and providing agreeable solutions, there has been an increase in compliance, since registration and compliance is rewarded with input credits, which was unavailable in the previous regime. The initial resistance displayed by the MSME’s operating in the informal economy, who pay a fraction of due taxes, have discovered they need to register, since input credits under the GST regime, can only be availed by registered businesses.


Tax Collection Expectations From GST Implementation

Taxpayer Base Expansion – the system has been designed smartly so that compliance becomes a necessity. With the turnover threshold limit lowered to Rs. 20 lakh (Rs.10 lakh for special states) many SME’s that operated in the grey area, now fall into the taxable net. Moreover, the IT system which will match invoices for claiming input tax credit, will make it difficult for tax evasion or avoid filing returns, forcing many business owners to register to avail of benefits such as input credits.


Organised Retail – With one unified tax, many SME’s that operated in the informal economy, which constitutes for 20% of the country’s GDP, will find it difficult to continue to file modified returns or evade taxes. The new IT system will allow the government to monitor each transaction in the supply chain making each transaction transparent and organizing the currently unorganized retail sector.


GDP Growth – One of the most highly anticipated benefits of implementing GST is the expected rise in the country’s GDP. India has the lowest tax (direct and indirect) to GDP ratio at 16%. A higher GDP allows the government to access the funds necessary to develop the nation. Currently USA, has a GDP of 35%. Under the GST regime, the expectation is to rise our current GDP by at least 4% from 16% to 20%. Therefore, an increase in tax collection will directly impact the country’s GDP. A higher GDP will enable the government to use resources to develop the nation.


Competitive Imports/exports – Under the previous tax regime, importers/manufacturers/exporters had to pay customs duty, excise and various taxes, significantly raising the costs of goods imported/exported. However, under GST, the option to avail of input credits would lower costs considerably, giving India a competitive edge in the global market. Hence, contributing to increasing the GDP also.


While there is debate over success of GST due to the hurdles being tackled, it is not uncommon. Every country that has adopted GST had faced similar struggles, but over the long term overcame them and benefited from implementing GST. The enormous task of taking 1.3 billion people into a unified organized economic sector with one unified tax is unchartered territory that not even the USA or European Union can boast of. The increase in revenue collection and more people moving into the taxable net, theatrically speaking should help boost our image globally and rise in the international competitive market.



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Annalakshmi Ekambaram
Annalakshmi Ekambaram
Annalakshmi is a content writer at H&R Block India. She enjoys writing about Income Taxes in a simplified manner so that everybody can easily understand it.

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