Indirect taxes in the journey of India’s economic growth

Indirect taxes have played a pivotal role in contributing towards the economic development of India.

The Vote-on-Account presented on Thursday by the Finance Minister, is an interim budget before the General Elections. A full-fledged budget is likely to be presented by the new Cabinet, possibly in July, following the conclusion of the election. The Finance Minister’s speech highlighted the advancements made by the Indian economy, progressing rapidly towards the goal of $5 trillion in the next three years and attaining the status of the third largest economy in the world.

In her budget speech, the Finance Minister attributed GST as one of the key elements for people-centric inclusive development. The “one nation, one market, one tax” agenda has helped in expanding taxpayers’ base and increasing tax collections. She mentioned that there has been an increase in the revenue of states, post introduction of GST, which has led to an overall growth in the economy. Consumers have also benefitted from GST, with removal of cascading effects due to multiple indirect taxes, resulting in reduction of prices of goods and services.

According to data released on 31 January, GST collections for January 2024 rank the second highest since July 2017, yet another macro indicator of the health of the economy.

A survey conducted by Deloitte providing insights into the sixth year of GST, was referred to by the Finance Minister in her speech. This survey invited views from the industry which acknowledged the government's proactive measures to simplify compliance that played a crucial role in the efficient adoption of the GST. The survey reflected a positive outlook towards ease of doing business in India with enhanced supply-chain efficiencies, working capital rationalisation, input cost reduction, etc. Continued focus on simpler and more efficient tax technology initiatives were also optimistically received. The survey results showed that while large taxpayers have been able to adapt to the technology tools introduced in GST, MSMEs have been facing challenges in e-invoicing and matching requirements for availing input credits.

Ambiguity regarding the application of the Input Service Distributor (ISD) and cross-charge mechanism have been resolved in the budget, with the amendment of the relevant provisions of GST law making ISD mechanism mandatory on a prospective basis. This is in line with the recommendations by the GST Council in recent meetings.

Measures have been taken under Customs to reduce the time taken for clearance of goods where the import release time at inland container depots have declined by 47 percent to 71 hours, air cargo complexes by 28 percent to 44 hours and sea ports by 27 percent to 85 hours. Leading to supply chain optimisation. Changes with respect to lowering of Customs duties on mobile phone components, extension of Customs duty concessions on lithium-ion cells for mobile phone, were recently made to provide the smartphone industry the ability to import components at lower rates and help this industry play a larger role globally.

Industry had expectations that an amnesty scheme could probably be introduced under Customs law to reduce litigation and for the digitalization of the Customs litigation processes, etc. These expectations may be taken up in the full budget to be presented after the elections.

Indirect taxes have played a pivotal role in contributing towards the economic development of India where a fragmented indirect tax system has been replaced. Compliances could be made simpler as there are sections (MSMEs and smaller players) who find rules tough to maneuver and to ease doing business in India.

Saloni Roy is Partner, Deloitte India. Views are personal, and do not represent the stand of this publication.