The Goods and Services Tax (GST) is likely to bolster revenue only in the long term, driven by a broadening tax base and higher compliance, but pose significant risks in the short term, according to a report by Fitch Ratings.
The landmark tax reform which came into effect from July 1, categorises most goods and services under four categories of 5, 12, 18 and 28 percent, while some commodities are exempted and some others have been left outside the perview of GST. It also incentivises stakeholders to comply with the law, via an input tax credit model.
Implementation of GST will bring in a chunk of small and medium enterprises (SME) under the tax bracket by lowering the taxable revenue limit to Rs 20 lakh from Rs 1.5 crore previously, said Fitch.
These factors will boost the government's tax revenue and streamline businesses into the formal sector, giving a boost to the country's Gross Domestic Product in the long term. The government's revenue stands at only 21.4 percent of the GDP as of 2016, the report added.
Bringing the informal sector into the formal sector has been one of the key agendas of the Narendra Modi government, apparent during the demonetisation in 2016 and now in the implementation of GST. Informal retailers currently account for 20 percent of the GDP and 80 percent of employment, the report claims.
The boost, however, will not come with out difficulties. Late changes to the GST bill and the tax overhaul will affect “the way businesses operate, affecting their financial reporting, tax accounting, supply-chain management and technology requirements,” the report added.
“There are significant short-term risks involved in the GST implementation, emphasised by the late changes to the bill and the disruptive roll-out of demonetisation,” Fitch said.
GST implementation in emerging countries is known to come with high compliance costs and administrative difficulties. The smaller firms, used to maintaining manual books, could also face a tough time, it added.
With PTI inputs.
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