GST leads to Formalization of Economy and Widening of Tax Base

GST leads to Formalization of Economy and Widening of Tax Base


Historic tax reform, the Goods and Service Tax (GST), has resulted in
formalization of economy and consequently information flow would eventually
augment not only the Indirect Tax collections but also Direct Tax collections. In
the past, the Centre had little data on small manufacturers and consumption
because the excise was imposed only at the manufacturing stage while the States
had little data on the activities of local firms outside their borders. Under the GST,
there will be now seamless flow of availability of common set of data to both the
Centre and the States making Direct and Indirect Tax collections more effective.
There are early signs of tax base expansion. Between June and July 2017, 6.6 lakh
new agents, previously outside the tax net, sought GST registration. This is expected
to rise consistently as the incentives for formalization increase. Entire Textile chain
is now brought under tax net. Further, a segment of land and real estate transactions
has also been brought into tax net “works contracts”, referring to housing that is
being built. This in turn would allow for greater transparency and formalization of
cement, steel and other sales which earlier tended to be outside the tax net. The
formalization will occur because builder will need documentation of these input
purchases to claim tax credit.
The introduction of GST, a common Indirect Tax for both the States as well as the
Central Government with its end to end digitization of all processes, is the biggest
reform measure which is already creating more jobs in formal sector and eliminating
transactions which are not recorded earlier in the books of accounts and thus, were
outside the tax net so far. GST is designed to bring about better tax compliance and
transparency in tax system. It is putting a premium on honesty. It would make
increasingly difficult for those (who are liable to pay tax) to remain outside the tax
net.
A number of procedural changes have also been made since the roll-out of GST on
1
st July, 2017 in order to simplify the processes. An extensive exercise was
undertaken for tax payers education and facilitation by way of knowledge sharing,
dissemination of information and replies to FAQs among others. Further, steps are
also being undertaken for further simplification in order to facilitate the tax payers
and to extend benefit to the customers.

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