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Chapter 01 : A New, Exciting Bird’s-Eye View of the Indian Economy Through the GST

This Chapter aims to provide a detail on how GST could help the Indian economy and Governance in a larger scale

Benefits of GST

The GST has been widely heralded for many things, especially

  1. its potential to create one Indian market,
  2. expand the tax base, and
  3. foster cooperative federalism
  4. its one enormous benefit: it will create a vast repository of information, which will enlarge and surely alter our understanding of India’s economy.

Data from the GST can help unveil some long-elusive and basic facts about the Indian economy

New findings include

  1. There has been a large increase in the number of indirect taxpayers; 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
  2. The distribution of the GST base among the states is closely linked to their Gross State Domestic Product (GSDP), allaying fears of major producing that the shift to the new system would undermine their tax collections;
  3. Data on the international exports of states suggests a strong correlation between export performance and states’ standard of living
  4. Internal trade is about 60 percent of GDP, even greater than estimated in last year
  5. India’s formal sector non-farm payroll is substantially greater than currently believed
  6. the size of the formal sector (defined here as being either in the social security or GST net) is 13 percent of total firms in the private non-agriculture sector but 93 percent of their total turnover.

TAXPAYERS

  • As of December 2017, there were 9.8 million unique GST registrants,1 slightly more than the total indirect tax registrants under the old system. But the two numbers are not comparable: registrants in the old system were not unique, since many taxpayers were registered under several taxes. Adjusting the base for double and triple counting, the GST has increased the number of unique indirect taxpayers by more than 50 percent_a substantial 3.4 million. One of the many benefits of the GST was the voluntary compliance it would elicit.

Current status of the Composition Scheme:

  • Further, about 1.6 million taxpayers (17 percent of the total) are registered under the composition scheme, the current threshold for which is fixed at Rs. 1.5 crore. They pay a small tax (1 percent, 2 percent or 5 percent) on their turnover and are not eligible for input tax credits. This set up minimizes their administrative burden, but also makes it difficult for them to sell to larger firms, which would not be able to secure input tax credits on such purchases
  • For this reason, about 1.9 million (24 percent of total regular filers) of the registrants sized between the GST threshold of Rs 20 lakhs and the composition limit who could have opted for the composition scheme chose not to do so and instead decided to file under the regular GST.

Based on the average collections in the first few months, the implied weighted average collection rate (incidence) is about 15.6 percent. So, as estimated by the RNR committee, the single tax rate that would preserve revenue neutrality is between 15 to 16 percent.

How are the states performing in enlarging the tax base?

    • Statistics on the performance of states in GST registration:  Maharashtra, UP, Tamil Nadu and Gujarat are the states with the greatest number of GST registrants.

  • The top states are Maharashtra (16 percent), Tamil Nadu (10 percent), Karnataka (9 percent), Uttar Pradesh (7 percent), and Gujarat (6 percent).

States GSDP and the GST base. Is there a correlation?

  • Each state’s share in the GST base is almost perfectly correlated (coefficient of 0.95) with its share in overall GSDP. So the biggest tax bases still seem to be in the biggest producing states.

Prelims Focus: The classification of firms according to the annual turnover:All firms are placed in five categories based on their annual turnover

  1. Below-threshold, less than Rs. 20 lakhs;
  2. Below-composition limit, Rs. 20-100 lakhs (the current upper limit of the composition scheme is Rs. 150 lakhs)
  3. Small and micro enterprises (SMEs), Rs. 1-5 crore;
  4. Medium, Rs. 5-100 crore; and
  5. Large firms above Rs. 100 crore.

Registered smaller firms (the first three categories) seem to be equally involved in selling to consumers (B2C) and selling to other firms (B2B).

International exports and States Prosperity:

  • The figure shows that the conventional wisdom is correct: a state’s GSDP per capita is highly correlated with its export share in GSDP (for the 20 major states).10 The one major outlier in the chart is Kerala, but only because it is a large recipient of remittances. If remittances are added and created a broader globalization index for states, Kerala may not be an outlier.

Prelims Focus: Arrange the following states in accordance with their share in exports? What will you do in these questions?  The answer lies in the economic survey and please go through the following table:

How our Internal Trade is Performing? Is there a change from previous understandings?

  • GST data suggests that India’s internal trade in goods and services (excludes non-GST goods and services) is actually even higher: about 60 percent of GDP.
  • States share in inter-state trade:

  • The five largest exporting states are

  1. Maharashtra,
  2. Gujarat,
  3. Haryana,
  4. Tamil Nadu
  5. Karnataka;
  • The five largest importing states are
  1. Maharashtra,
  2. Tamil Nadu,
  3. Uttar Pradesh,
  4. Karnataka and
  5. Gujarat
  • The states with the largest internal trade surpluses are
  1. Gujarat,
  2. Haryana,
  3. Maharashtra,
  4. Odisha and
  5. Tamil Nadu

“These data are crucial in prelims point of view”

TRADING SUPERSTARS: INDIAN EXPORT EGALITARIAN EXCEPTIONALISM

    • new GST data it is possible to construct firm-level exports
    • Export concentration by firms is much lower in India than in the US, Germany, Brazil, or Mexico11. For example:
      • The top 1 percent of firms accounted for 72, 68, 67, and 55 percent of exports in Brazil, Germany, Mexico, and USA respectively but only 38 percent in the case of India
      • The top 5 percent accounted for 91, 86, 91, and 74 percent in those countries, compared with 59 percent in India;
      • The top 25 percent of firms accounted for 99, 98, 99, and 93 percent in those countries, as opposed to 82 percent in India.

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  • The following graph shows the egalitarian aspect of Indian exports.

  • Here the red line shows the performance of India. I.e, In India instead of focussing a single firm on exports more firms, have a direct stake in export.
  • There is one caveat which could help explain the atypical Indian distribution: unlike in other countries, Indian data include exports of services, where concentration ratios tend to be much lower than in manufacturing
  • The implications of such an “egalitarian” Indian export structure are unclear. The evidence cited earlier argues in favour of superstars because they are dynamic and their expansion can have spillover effects on other firms. But concentration can have disadvantages, including impeding competition.

INFORMALITY OF THE INDIAN ECONOMY: Is our economy truly informal?

  • Finally, the GST data throw up new data that allows a better re-examination of the extent of formality/informality in the Indian economy

Informality or rather formality can be defined in at least two senses

  • First, when firms are providing some kind of social security to employees. In India, government provides this for its employees, and the Employees’ Provident Fund Organization (EPFO) provides it to private sector employees in respect of pensions and provident funds; and the Employees’ State Insurance Corporation (ESIC) in respect of medical benefits.
  • A second definition of formality is when firms are part of the tax net. Since new data on the GST is available, one can define tax formality as firms having registered under the GST.

Status of Indian Firms:

  • About 0.6 percent of firms, accounting for 38 percent of total turnover, 87 percent of exports, and 63 percent of GST liability are what might be called in the “hardcore” formal sector in the sense of being both in the tax and social security net.
  • At the other end, 87 percent of firms, representing 21 percent of total turnover, are purely informal, outside both the tax and social security nets.
  • Around 12 percent of firms, accounting for 41 percent of turnover, 13 percent of exports, and 37 percent of tax liabilities are in the tax net but not the social security net. These firms are relatively smaller than those in both nets, since they have a lower average turnover and average tax rate, 7 percent compared with 16.3 percent.
  • Finally, less than 0.1 percent of firms accounting for about 14 percent of turnover are in the social security net but not in the GST net. These are mostly firms that are in GST-exempted sectors (such as education, health, electricity), although there are many firms that appear to be outside the GST even though they are in the GST-included sectors.

Non-Farm Payroll

  • Turn next to formal and informal nonfarm payroll.15 Formal non-farm payroll from a social security perspective is estimated at about 7.5 crores, or 31 percent of the non-agricultural workforce
  • This estimate includes government non-farm payroll (center and states), which is roughly estimated at 1.5 crore (excluding defence personnel).
  • The tax-based numbers exclude government employees and also non-farm payroll that takes place in sectors currently outside the GST such as health and education, although if firms in these sectors register for other reasons, they will be part of estimated nonfarm payroll.
  • Taking all these into account, and adding back government employment, the formal nonfarm payroll from a tax definition is estimated at 12.7 million. This implies that nearly 53 percent of the non-agricultural workforce (240 million) is in the formal sector.
  • These estimates for formal non-farm payroll, ranging from 31 percent in the case of social security-defined formality and 53 percent in the case of tax-defined formality, are considerably greater than current beliefs about the size of formal sector non-farm payroll.