Chapter-2: A New, Exciting Bird’s-Eye View of the Indian Economy through the GST

GST was launched nationwide on July 1, 2017. Since then, one of the side-products of GST implementation is a huge information repository on India’s trade and indirect taxation. This information repository serves to provide new insights on Indian economy and economic survey has dedicated one chapter on those insights.
For your examination, the key points from this chapter are as follows:

What is the current status of Indirect Tax Base after GST implementation?

There are around 71 million (7 crore) non-farm enterprises in India. Of these, around 13% (around 9.2 million) firms are now registered under GST. This is slightly more than the total number of firms registered under old service tax/ excise duty/VAT regime. However, GST has resulted in a 50% increase in number of indirect taxpayers. Most of this increase has come from voluntary registrations, especially by small enterprises that buy from large enterprises and want to avail themselves of input tax credits. Further, a large number of small enterprises (turn over less than Rs. 1.5 Crore) have opted for composition scheme.

Which States account for largest fraction in GST base?

The distribution of the GST base among the states is closely linked to the size of their economies. Thus, the economically bigger states have bigger share in GST base. The top states are Maharashtra (16 percent), Tamil Nadu (10 percent), Karnataka (9 percent), Uttar Pradesh (7 percent), and Gujarat (6 percent).

We recall here that prior to GST implementation, there was a fear among states that the switch from a production to destination based tax might transfer the tax-base towards the consuming states {we had also discussed this in CGS documents here}. But, so far that has not been true. The current data allays the fears of major producing states that the shift to the new system would undermine their tax collections.

What are different categories of firms under GST? Which categories have maximum/ least number?

Under GST, all firms are placed into five categories based on their annual turnover as follows:

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

The below threshold firms have least share in tax liability but their number is largest. Reverse is true for large firms.

How exports of states are linked to their prosperity?

Five states viz. Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana account for 70% of India’s total exports of goods and services. These, except Kerala, are also the states with highest GSDP per capita. Kerala has one of the top GSDP per capita but is not included in top exporters (Kerala’s GSDP is driven by inward remittances). Similarly, five largest importing states are Maharashtra, Tamil Nadu, Uttar Pradesh, Karnataka and Gujarat, while the states with the largest internal trade surpluses are Gujarat, Haryana, Maharashtra, Odisha and Tamil Nadu. Thus, the survey interprets that the prosperity of the states in India is a direct function of their inter-state, international trade i.e. exports and imports.

Why the survey calls India’s exports as ‘egalitarian exceptionalism’?

The survey points that in western countries, larger number of firms account for large share in exports. In India, reverse is true. Here, merely 1% of export firms account for over 38% of exports. Though this indicates a monopoly of few large firms in exports in India but survey takes it positively and calls these firms “exports superstars”.

What are the current trends in formalization of Indian Economy?

A firm can be called formal in two ways. Either it provides some kind of social security to its employees or the firm is part of tax net (i.e. registered under GST).

Fact Box: Social Security in India

Social security to employees in India is provided mainly in three ways as follows:

• For government employees, pension / social security is provided by government.
• For private firms, pension and provident funds are provided by Employees’ Provident Fund Organization (EPFO). EPFO contribution is mandatory for industries employing greater than 20 workers, and whose monthly wage/salary is below Rs. 15,000. Above that level, contributions are voluntary. Of the total active members (for whom the monthly contribution is deposited by the employer), 86 percent earn less than Rs 15,000, and about 98 percent have opted for a combination of the ‘provident fund-pension’ option
• Medical benefits are provided by Employees’ State Insurance Corporation (ESIC) in respect of medical benefits. ESIC contribution is mandatory for certain firms, employing greater than 10 workers, and for workers in these firms whose monthly wage/salary is below Rs. 21,000.

They key survey findings on formalization of the economy are as follows:

• Around 0.6% of firms in India fulfill both of the above conditions i.e. they are under GST net and also provide social security to their employees. Such firms account for around 38% of total turnover, 87% of exports and 63% of GST liability. This is India’s hard core formal sector.
• 87% of Indian firms are outside both of these conditions. They are neither under GST nor provide social service benefits to their employees. They account for around 21% of total turnover. This is India’s informal sector.
• Around 12% firms are under GST only. This segment accounts for 41% of turnover.
• 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).

On the basis of these points, we can conclude that India has 87% informal economy, and merely a 13% formal sector of economy. Around 80% of the total turnover of business is shared by formal sector though.

However, on employment in formal / informal sector, the survey says that the formal non-farm workforce (including government employees) accounts for 31% of total non-farm workforce in India by social security perspective while 53% by tax net perspective. But the key issue here is that both of these estimates have a difference of 5.2 crore people! This higher than estimated formal workforce theory comes at a time when government is under pressure from all sides on its inability to generate employments and jobless growth.

Nevertheless, this finding would generate flak soon similar to what happened when SBI had linked job creation to new EPFO account openings. New EPFO accounts may not necessarily mean new jobs

What is quantum of India’s internal trade as fraction of GDP?

India’s internal trade is about 60 percent of GDP, even greater than estimated in last year’s Survey and comparing very favourably with other large countries.