- On Goods and Services Tax (GST) Reforms
- Is India Losing Sheen for Investors?
The Goods and Services Tax (GST), now in its six-and-a-half-year milestone this month, has generated nearly ₹3.4 lakh crore during October and November. October witnessed the second-highest monthly collections, and November followed closely as the third highest.
- Indian Economy and issues relating to Planning
- Mobilization of Resources
- Inclusive Growth and issues arising from it
Healthier inflows from GST offer policy makers the bandwidth to fix its flaws. Comment in the context of recent GST collection figures. (10 marks, 150 words).
- The Goods and Services Tax (GST) is a value-added tax imposed on the majority of goods and services sold for domestic consumption.
- Consumers bear the burden of the GST, but businesses selling the goods and services are responsible for remitting it to the government.
Key Characteristics of GST:
- Applicability on the Supply Side: Unlike the previous concept of taxing the manufacture, sale, or provision of services, GST is applicable to the “supply” of goods or services.
- Destination-based Taxation: GST follows the principle of destination-based consumption taxation, in contrast to the existing principle of origin-based taxation.
- Dual GST: It operates as a dual GST, with both the Centre and the States concurrently imposing taxes on a shared base. The GST levied by the Centre is known as Central GST (CGST), and that imposed by the States is State GST (SGST).
- Import of goods or services is considered inter-state supplies and is subject to Integrated Goods & Services Tax (IGST) along with applicable customs duties.
- Mutual Agreement on GST Rates: CGST, SGST, and IGST rates are determined through mutual agreement between the Centre and the States, with the rates being notified based on the recommendations of the GST Council.
- Multiple Rates: Initially, GST was applied at four rates – 5%, 12%, 16%, and 28%. The specific items falling under these categories are decided by the GST Council.
Legislative Basis of GST:
The GST Bill was introduced in India in 2014 as The Constitution (122nd Amendment) Bill. It received approval in 2016 and was renumbered in the statute as The Constitution (101st Amendment) Act, 2016. The provisions include:
- Central GST covering Excise duty, Service tax, etc.
- State GST covering VAT, luxury tax, etc.
- Integrated GST covering inter-state trade, serving as a coordination system for state and union taxes.
- Article 246A grants states the power to tax goods and services.
- Article 279A establishes the GST Council, formed by the President to administer and govern GST. The Union Finance Minister of India serves as its Chairman, with members nominated by state governments.
- The council is structured such that the centre holds 1/3rd voting power, while the states collectively have 2/3rd.
- Decisions are made by a 3/4th majority.
More on the Collection Figures:
- Both months exhibited accelerated revenue growth after a series of slowing upticks, with September marking a 27-month low of 10.2%.
- October’s GST inflows increased by 13.4%, and November’s by 15.1%, notably with domestic transactions contributing a 20% rise, the highest in 14 months.
- The festive season likely played a role in boosting last month’s GST revenues, reaching nearly ₹1.68 lakh crore based on October transactions, a trend that might continue this month, especially with anticipated last-minute Deepavali spending.
- Before this two-month upswing, GST revenues had crossed ₹1.65 lakh crore only three times, usually driven by year-end compliances.
- of 2023-24, the average monthly collection stands at ₹1.66 lakh crore, and economists suggest that central GST receipts may surpass Budget estimates, even considering a potential relative slowdown in the final quarter of this year.
- In response to concerns raised during a recent industry interaction about the handling of numerous GST demand notices and investigations in recent months, Finance Minister Nirmala Sitharaman acknowledged that the GST is currently transitioning from “uncertainty to certainty” on certain fronts, and efforts are underway to address these issues.
- An essential aspect is the escalation in pending taxpayer appeals against central GST levies, which surged by a quarter this year, reaching nearly 15,000 cases by October.
Making GST more effective:
- Benefiting from robust revenues, primarily attributed to enhanced compliance measures and intensified actions against tax evaders, the government should contemplate readjusting its goals to transform the Goods and Services Tax (GST) into a genuinely efficient and straightforward tax system, as initially promised.
- This pursuit of certainty should extend broadly to instill genuine confidence among investors regarding the stability and predictability of India’s tax system.
- It is imperative for the GST Council to expedite the operationalization of appellate tribunals cleared by them, resolving this backlog and establishing clear precedents for future tax treatment disputes.
- Equally crucial is the formulation of a roadmap to integrate excluded items like petroleum and electricity into the GST framework, along with streamlining its intricate multiple rate structure.
While some hesitation on these reforms may be understandable given the upcoming general election, the GST Council must stay focused on its unfinished agenda. Continuous deliberation on the to-do list is necessary so that these crucial steps can be promptly implemented after the Lok Sabha election.
India experienced a 7.6% growth in its GDP during the second quarter (July-September) of the year, signalling a positive trend in economic expansion. However, the substantial decrease in foreign direct investment (FDI) raises concerns, particularly given India’s recent emergence as an attractive investment destination and a credible alternative to China.
Government Policies & Interventions
- Growth & Development
The slowdown in foreign direct investment in India is a cause for concern, as multinational corporations are finding other competitors more attractive. Analyse and suggest and way forward strategy to deal with this issue.
- Foreign Direct Investment (FDI) refers to an investment carried out by a company or individual in one nation to acquire business interests situated in another country. FDI enables an investor to acquire a direct stake in a foreign country’s business operations.
- There are various methods through which investors can engage in FDI, including establishing a subsidiary in another country, acquiring or merging with an existing foreign company, or forming a joint venture partnership with a foreign counterpart.
- Beyond its role as a crucial driver of economic growth, FDI has emerged as a significant non-debt financial resource contributing to the economic development of India.
- It differs from Foreign Portfolio Investment (FPI), where the foreign entity simply purchases stocks and bonds of a company, providing the investor with no control over the business.
Statistics on FDI:
- As per the latest report from the Department for Promotion of Industry and Internal Trade (DPIIT), FDI inflows have sharply decelerated, with a further decline of -24% recorded in April-September 2023.
- The current FDI inflow stands at $20.48 billion, down from $26.91 billion in the same period last year.
- The overall FDI inflows for 2022-23 witnessed a 16% decrease, totaling $71.3 billion compared to $84.8 billion in 2021-22.
- Key sectors like computer software and hardware, automobile, infrastructure construction activities, and metallurgical industries have experienced significant drops in FDI.
- For example, computer software and hardware inflows decreased from $14.4 billion in 2021-22 to $9.3 billion in 2022-23, and the automobile industry saw a decline from $6.9 billion to $1.9 billion.
Concerns Associated with the Slowdown in FDI:
- This decline is alarming, especially considering optimistic growth projections by the International Monetary Fund (IMF) and The World Bank.
- The slowdown in FDI is concerning, especially as multinational corporations (MNCs) show a preference for other nations like Vietnam and Indonesia, indicating a potential flaw in the “China plus one” strategy for India.
- FDI in Vietnam increased by approximately 8% during January-September, reaching about $18 billion, while Indonesia maintained FDI flows at around $10 billion during the same period.
- India’s exclusion from major trade agreements, like the European Union and RCEP, puts it at a disadvantage in the global manufacturing ecosystem.
- It is crucial to note that FDI tends to favor countries with comprehensive trade agreements, and the decline in FDI to India may reflect the need for a deeper assessment of the country’s prospects.
- Various factors influence capital flows, including the global and domestic macroeconomic environment, policy and regulatory conditions, and political stability. Given India’s potential under the “China plus one” strategy, policymakers must closely monitor these FDI trends.
- Despite being a viable alternative to China, concerns about an uncertain business environment or arbitrary rule changes must be addressed to attract MNC investments.
- Expanding the scope of FDI to more Indian states is recommended, as currently, Maharashtra, Karnataka, and Gujarat attract a significant portion of FDI.
- Addressing hurdles faced by states like Punjab, such as location disadvantage and poor connectivity, is essential to distribute FDI more evenly and boost economic growth.
- To enhance the attractiveness for FDI, India must accelerate structural reforms, combat corruption, reduce bureaucratic red tape, and adopt a comprehensive trade policy that promotes exports, inclusive development, and research and development.
While India holds great potential as an investment destination, swift and assertive actions are needed to address the challenges and create an environment conducive to foreign direct investments.