With better compliance resulting from a large number of businesses moving into the formal economy, tax revenues in the post-GST regime will get a boost—the very fact of input-matching will get more into the tax net.
To the extent GST has been fashioned to be non-inflationary and lower rates, it can even lead to a rebound in demand. However, a change in the method of taxation of this magnitude is bound to have it share of teething troubles and there will be supply disruptions.
Smaller companies, for instance, could find the compliance onerous in the initial stages, though it is likely most of those with a turnover of between Rs 20 lakh and Rs 75 lakh will opt for the presumptive tax. Even those businesses that have a turnover of over Rs 75 lakh will, ultimately, prefer to be part of the organised supply chain for fear of losing out on business.
With the effects of demonetisation now wearing out and the monsoon expected to result in a bumper crop, there’s reason to believe demand will bounce back over the next few months.
Nevertheless, given the disruption and de-stocking in the first quarter of FY18, there could be some shortfall in indirect tax collections for the year pegged in the budget for FY18 at Rs 6.81 lakh crore.
However, even if total tax collections don’t come in as per the estimates, the government may want to continue to spend as it had planned. Any cut in expenditure could lead to a loss in momentum for the economy, at a time when there is very little private sector investment. In fact, without the push from government consumption, which rose 32% y-o-y in Q4FY17, GDP would not even have grown by 6.1%. If the economy is to grow by about 7% this year, there needs to be a meaningful contribution from government spending.