Economic Survey 2018 - Vol.1,Ch.2: a New,Exciting Bird’S-EYE View of Indian Economy Through the GST (Download PDF)

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As an information repository, the Goods and Services Tax (GST) embodies and heralds a radical alteration and enlargement in the understanding of the Indian economy. The distribution of the GST base among the states is closely linked to their Gross State Domestic Product (GSDP)

  • The GST has been widely heralded for many things, especially

    • Its potential to create one Indian market

    • Expand the tax base

    • Foster cooperative federalism.

  • Data from the GST can help unveil some long-elusive and basic facts about the Indian economy. Some exciting new findings include

    • 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.

    • New data on the international exports of states suggests a strong correlation between export performance and states’ standard of living.

    • The largest firms account for a much smaller share than in other comparable countries.

    • Internal trade is about 60 % of GDP, even greater than estimated in last year’s Survey.

    • India’s formal sector non-farm payroll is substantially greater than currently believed.

    • The size of the formal sector is 13 % of total firms in the private non-agriculture sector but 93 % of their total turnover.

Taxpayers

Few facts about taxpayers

  • There were 9.8 million unique GST registrants, 1 slightly more than the total indirect tax registrants under the old system.

  • 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 % a substantial 3.4 million.

  • Of their total turnover, business-to-consumer (B2C) transactions account for only 17 % of the total. The bulk of transactions are business-to business (B2B) and exports, which account for 30 - 34%.

  • One of the many benefits of the GST was the voluntary compliance it would elicit. Out of the total estimated 71 million non-agriculture enterprises, it is estimated that around 13 % are registered under GST.

  • About 1.6 million taxpayers (17 % of the total) are registered under the composition scheme. They pay a small tax (1%, 2 % or 5%) 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 % 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.

  • Maharashtra, UP, Tamil Nadu and Gujarat are the states with the greatest number of GST registrants. UP and West Bengal have seen large increases in the number of tax registrants compared to the old tax regime.

Tax Base and Its Spatial Distribution

  • Data suggest that the GST tax base (excluding exports) is Rs. 65 - 70 lakh crore, broadly similar to estimates.

  • Data on the state wise share of the total GST base show that the top states are Maharashtra (16%), Tamil Nadu (10%), Karnataka (9%), Uttar Pradesh (7%), and Gujarat (6%).

  • The biggest tax bases seem to be in the biggest producing states.

  • The share of Maharashtra’s and Gujarat’s tax base under the GST is lower than their share of manufacturing but because these two states have a significant presence in services, their tax base share remains in line with their share of GSDP.

Size Distribution of Inter-firm Transactions

  • The nature of transactions between firms is critical in formulating policy, especially designing compliance procedures.

  • Table given below shows the transaction type by the size of the firm. All firms are placed in five categories based on their annual turnover.

Image of inter-firm transactions

Image of Inter-firm Transactions

Image of inter-firm transactions

  • The categories can be given as

    • 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;

    • large firms above Rs. 100 crore.

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

  • 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.

  • About half the transactions of the below-threshold firms which nonetheless voluntarily chose to comply are actually in the B2C space. This suggests that there are, in fact, other motivations for participation, beyond simply being a supplier to larger companies.

  • Small B2C firms want to be part of the GST because they buy from large enterprises. In fact, 68 % of their purchases are from medium or large registered enterprises, giving them a powerful incentive to register, so they could secure input tax credits on these purchases.

International Trade, Interstate Trade and Economic Prosperity

  • For the first time in India’s history it is possible to know the state-wise distribution of international exports of goods and services.

  • Five states: Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana in that order account for 70 % of India’s exports.

  • A state’s GSDP per capita is highly correlated with its export share in GSDP is shown in the table.

Image of export share in GSDP

Image of Export Share in GSDP

Image of export share in GSDP

  • 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.

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

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

  • 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.

📝 Trading Superstars: Indian Export Egalitarian Exceptionalism

  • New findings on firm level concentration of exports and comparing similar findings of few other major countries, are striking. Export concentration by firms is much lower in India than in the US, Germany, Brazil, or Mexico. Some of the findings include

    • The top 1 % of firms account for 72, 68, 67, and 55 % of exports in Brazil, Germany, Mexico, and USA respectively but only 38 % in the case of India.

    • The top 5 % accounted for 91, 86, 91, and 74 % in those countries, compared with 59 % in India

    • The top 25 % of firms accounted for 99, 98, 99, and 93 % in those countries, as opposed to 82 % in India.

  • Indian data includes exports of services, where concentration ratios tend to be much lower than in manufacturing.

Informality of the Indian Economy

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

  • In India some kind of social security, is provided by government 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.

  • The 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.

  • The following are the key findings

  • About 0.6 % of firms, accounting for 38 % of total turnover, 87 % of exports, and 63 % of GST liability are what might be called in the “hard core” formal sector in the sense of being both in the tax and social security net.

  • At the other end, 87 % of firms, representing 21 % of total turnover, are purely informal, outside both the tax and social security nets.

  • Around 12 % of firms, accounting for 41 % of turnover, 13 % of exports, and 37 % 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 % compared with 16.3%.

  • Finally, less than 0.1 % of firms accounting for about 14 % 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),

Non-Farm Payroll

  • Formal non-farm payroll from a social security perspective is estimated at about 7.5 crores, or 31 % of the non-agricultural workforce. This estimate includes government non-farm payroll (center and states), which is roughly estimated at 1.5 crore.

  • 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.

  • The formal nonfarm payroll from a tax definition is estimated at 12.7 million. This implies that nearly 53 % of the non-agricultural workforce (240 million) is in the formal sector.

  • It is important to emphasize that these estimates are enterprise-based not household based definitions of employment and also exclude the agricultural sector

- Published/Last Modified on: February 8, 2018

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