Modi govt's tax reforms: GST, a game-changer for the Indian economy

The August 2018 report of the RBI suggests that Rs 15.31 trillion of Rs 15.41 trillion demonetised currency have returned to the banking system

In a special midnight Parliament session, Narendra Modi-led government implemented the biggest-ever tax reforms in the country’s history, paving the way for an era of the uniform tax regime. Close to two years on, the goods and services tax (GST) is set to face its biggest test yet, as the country heads to the Lok Sabha polls.

The GST, rolled out to replace an intricate indirect tax system structure, had increased the indirect taxpayers and made them more accountable. However, this reform had also put brakes on the economy as growth slowed to 5.7 per cent in the first quarter of 2017-18.

The companies, especially small traders, grappled with operational issues as the high-tech GST network (GSTN) software could not cope with the last-minute tax filing rush, forcing the government to extend the deadline. The GST system was designed to discourage tax evasions and has since been simplified to make compliance easier.

The simplification led to an increase in the taxpayers’ return filing. However, the collection figures are still way short of the Rs 12.5-trillion target in the current fiscal, which has so far seen a collection of Rs 8.7 trillion.

So far, 17 taxes and multiple cesses were subsumed into GST, combining central taxes such as excise duty, services tax, and state taxes. Experts believe that it has reduced the cascading effect of a multitude of indirect taxes.

Saloni Roy, senior director, Deloitte India, said, “The government has made corrections while addressing the issue of inverted-duty structure. From its Budget in 2014, it has made constant efforts in incentivising domestic manufacturing, as compared to an import-and-sell model. This has been done by providing concessions/exemptions on duties applicable on import of capital goods and/or raw materials, which are essential to enable manufacturing in India.”  

Measures to curb black money

With indirect taxation system still taking time to stabilise, the direct taxation had seen ups and downs with taxpayers’ base go up while the battle against the black money did not really fetch the desired result. The Modi government-appointed Special Investigation Team (SIT) on black money, same day it came into power in 2014 and had come out with six reports so far suggesting various measures to check on the black money.

The onus of the clean-up exercise have been given to the Central Board of Direct Taxes (CBDT), an apex body for direct taxation as the objective was to reduce pressure of the spiralling fiscal deficit, which contracted from 5 per cent to 3.5 per cent over the last five years.

The last four and a half years were challenging for the income tax (I-T) department, as it had to make people voluntarily come clean as it attempted meeting the revenue collection targets.

Action has been initiated under the benami transactions and foreign undisclosed income cases under the newly enforced Benami Transactions Act and Black Money (Undisclosed Foreign Income and Assets) Act. However, the recovery has been below expectations.

While on the policy front, the CBDT had proposed to companies that taxpayers who had got their accounts audited would be required to submit their income estimates and tax liabilities for six months of the financial year to the I-T department by November 15. This, however, could not be implemented owing to widespread criticism.

Besides, the government decided to link the Aadhaar number with bank accounts and other transactions but the idea was scrapped by the Supreme Court.

Meanwhile, the tax department has launched various clean-up exercise such as Operation Clean Money, Project Insights. To reduce human intervention in tax proceedings, the government wants the department to not meet assessees in person.

These apart, the concept of jurisdiction-free assessment has though kicked off successfully but is yet to be fully operational. Overall, the measures on taxation had been made stringent but its steps such as demonetisation had backfired the strategy.

The August 2018 report of the Reserve Bank of India suggests that Rs 15.31 trillion of Rs 15.41 trillion demonetised currency have returned to the banking system.

On the other hand, the government’s voluntary schemes have also not given the expected results, such as the Pradhan Mantri Garib Kalyan Yojna (PMJKY), the second voluntary scheme in the three years of the Modi government. Taxmen failed to encourage people to take advantage of the scheme. The government reportedly managed to garner only Rs 2,300 crore against the informal target of Rs 1 trillion.

In Budget 2018, the government withdrew the exemption of taxes on long-term capital gains on equity investments. The move was triggered by manipulation in the stock prices by dealing in shell company shares. Industry experts, though, wanted the government to remove securities transactions tax, but it has not received a positive response yet.

In addition to these, investigation into foreign disclosure cases like the British Virgin Island, Panama Paper leaks, Paradise and suchlike is to see a breakthrough. The NDA government introduced place of effective management (PoEM) and general anti-avoidance rule (GAAR) to curb tax avoidance.

Major tax reforms

• GST implementation took place in 2017. One of the biggest tax reforms in the country, GST not only aligned the Indian indirect taxation, but also paved the way for uniform taxation. However, it led to disruption in the economy, and growth slowed to 5.7% in April-June quarter of 2017-18
• Linking GST implementation and filing of income tax returns; introduced e-assessment 
• POEM and GAAR were implemented to curb tax avoidance
• Number of amendments to implement BEP’s namely around Digital PE, Equalisation levy, Agency PE 
• Introduced Black Money Act and Benami Transactions Act to eradicate black money generation 
• Income Disclosure scheme 2016 — a 90-day window to come clean, followed by PMJKY scheme, popularly known as IDS-II 
• Ban on cash deposits of ~3 lakh and above in bank accounts 
• Reduction in time for completing assessments 
• Reduction in corporate tax rate to 25% for some corporates 
• Ending the exemption for LTCG 
• Fiscal deficit contracted from 5% to 3.5% over the last five years 
• Amount of tax collections and tax assesses have gone up significantly in five years