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ECONOMIC SURVEY VOLUME 1

CHAPTER 2

ANUJ JINDAL
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CHAPTER -2

A NEW, EXCITING BIRD’S –EYE VIEW OF THE INDIAN ECONOMY THROUGH THE GST

INTRODUCTION:

This chapter provides an understanding of outcomes of GST through various perspectives-taxpayers, tax
base and its spatial distribution etc. The chapter gives a hint of the insights that analysis of the GST will
be able to provide in the future.

GST has been widely heralded for many things - potential to create one Indian market, expand the tax
base, foster cooperative federalism and creating a vast repository of information, which will enlarge and
surely alter understanding of India’s economy.

Exciting new findings include:

1. TAXPAYERS

• There has been a 50% increase in the number of indirect taxpayers (a substantial 3.4 Million)
• Voluntary compliance: 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.
• Composition scheme: Taxpayers (with turnover less than 1.5 crore) registered under this
scheme pay a small tax (1%, 2% or 5%) on their turnover. It reduces administrative burden of
taxpayers but makes it difficult for them to sell to larger firms as they are not eligible for input
tax credits. Thus, more than 54.3% of those eligible to register under the composition scheme,
chose instead to be regular filers.
• Majority of new filers in Indirect Tax regime are business to business and export oriented
companies (30-34%)
• States with the greatest number of GST registrants: Maharashtra, UP, Tamil Nadu and Gujarat.
UP and West Bengal have seen large increases in the number of tax registrants compared to the
old tax regime.

2. TAX BASE AND ITS SPATIAL DISTRIBUTION:

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• The distribution of the GST base among the states is State Share (of GST)
closely linked to their Gross State Domestic Product
(GSDP), allaying fears of major producing states that Maharashtra 16%
the shift to the new system would undermine their tax
collections as GST is a destination and consumption Tamil Nadu 10%
based tax. Karnataka 9%
• Though manufacturing states’ (Gujarat and
Maharashtra) tax base under the GST is lower than UP 7%
their share of manufacturing, but they also have a
presence in services, so their tax base share remains in Gujarat 6%
line with their share of GSDP suggesting fairness and
balance in the GST outcomes.
• Each state’s share in the tax base is almost perfectly correlated with its share in GSDP.
• REVENUE NEUTRAL RATE - it is the tax rate that allows the government to receive the same
amount of money despite changes in tax laws.
• that single rate, which preserves revenue at desired (current) levels.
• RNR should be distinguished from the “standard” rate defined as that rate in a GST
regime which is applied to all goods and services whose taxation is not explicitly
specified.
• as estimated by the RNR committee, the single tax rate that would preserve revenue
neutrality is between 15 to 16 percent.

3. SIZE DISTRIBUTION OF INTER-FIRM TRANSACTIONS

• Skewed distribution of turnover: The registered below-threshold firms account for 32 percent of
total firms but less than 1 percent of total turnover, while the largest account for less than 1
percent of firms but 66 percent of turnover, and 54 percent of total tax liability.

Category of firms Annual Turnover (in Rs.)

Below Threshold < 20 lakhs
Below Composition limit 20-100 lakhs (now 150 lakhs)
SME 1-5 crores
Medium 5-100 crores
Large >100 crores

• Registered smaller firms (the first three categories) seem to be equally involved in selling to
consumers (B2C) and selling to other firms (B2B). Medium and large firms, in contrast, have a
much greater presence in B2B than B2C transactions.
• Small B2C firms want to be part of the GST because they buy from large enterprises (68% from
medium and large) giving them an incentive to register so that input tax credit on such
purchases can be obtained.

4. INTERNATIONAL TRADE, INTERSTATE TRADE AND ECONOMIC PROSPERITY

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• Data on the international exports of states (the first in India’s history) suggested prosperity
related to export performance - a state’s GSDP per capita is highly correlated with its export
share in GSDP (Kerala being an outlier as it is a large recipient of remittances).
• India’s internal trade in goods and services is 60% of GDP, a relatively high number compared to
other countries.
• Data on inter-state trade :

Description
Largest exporting states (about 70%
of total)
Largest importing states
Largest internal trade surplus
States
Maharashtra, Gujarat, Haryana, Tamil Nadu, Karnataka;
Maharashtra, Tamil Nadu, UP, Karnataka, Gujarat;
Gujarat, Haryana, Maharashtra, Odisha, Tamil Nadu.

• Two important observations:

(a) The states that export the most are also the ones that import the most.
(b) The states that trade the most are the ones that are the most competitive and run the
largest trade surpluses.
• The correlation of per capita GSDP with international exports is stronger than with inter-state
trade.

5. TRADING SUPERSTARS: INDIAN EXPORT EGALITARIAN EXCEPTIONALISM

• Exports superstars—firms that account for a disproportionately large share of exports. But
India is an exception with an egalitarian export structure.
• Export concentration by firms is much lower in India than in other advanced economies.

Share of exports India Major countries

Top 1% 38 55-72
Top 5% 59 74-91

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Top 25% 82 93-99

• The possible reason could be that unlike in other countries, Indian data includes exports of
services, where concentration ratios in top firms tend to be much lower than in manufacturing.
• Egalitarian export structure has:
Advantages – expansion has spillover effects on other firms and they are dynamic
Disadvantages – impede competition

6. INFORMALITY OF THE INDIAN ECONOMY

• Major findings related to size of formal and informal sector –

% of firms Social security net Tax net

0.6 Yes Yes
87 (purely informal) No No
12 No Yes
0.1 Yes No

• India’s formal sector non-farm payroll is substantially greater than currently believed. Its
estimate is ranging from 31% in the case of social security-defined formality and 53% in case of
tax-defined formality.

Survey has defined formality in 2 senses:

1. Social security provided by firms

2. Firms under tax net

Social security provided by firms:

1. Pension and Provident funds: Employees Provident Fund Organization (EPFO) contribution is
mandatory for firms employing greater than 20 workers and whose monthly salary is below
15000. Beyond which, contributions are voluntary.
2. Medical benefits: Employees’ State Insurance Corporation (ESIC) contribution is mandatory for
firms employing greater than 10 workers and whose monthly salary is below 21000.

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