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How Is GST Making Direct Taxation More Effective?

The most important step towards making GST operational was to make technology adoption a reality. Yes, there were teething troubles, as happens with any new reform. Once GST taxpayers started gaining an understanding of how the new systems worked, the operations became much smoother

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The implementation of Goods and Services Tax has been one of the most iconic and monumental economic reforms in Indian history. 2017 has been spent both by the Government and industries to ensure that the subsequent introduction and roll out are improved. Despite setbacks and infrastructure challenges, the results have been positive. And a key benchmark here has been that despite being an indirect tax, GST has been instrumental in improving direct taxation as well. 


That’s because it’s the one tool which provides tax officials with data to calculate incomes of people, against the income taxes paid by them. There has been an 18% increase in direct tax collections in the first quarter of the year. Furthermore, the first quarter of this year showed that corporate tax increased by 17%. 


What made this possible? There were several factors that contributed to the GST impact on direct taxes. 


Digitization and Value of Information Sharing


The most important step towards making GST operational was to make technology adoption a reality. Yes, there were teething troubles, as happens with any new reform. Once GST taxpayers started gaining an understanding of how the new systems worked, the operations became much smoother. In addition, in the earlier regime, information sharing was a nightmare thanks to the sheer number of taxes. The Income Tax Department did not have any access to the data which is filed under Central Excise, Service Tax, and various state VAT laws. Now, due to GST, IT department too will have a clear picture of every business and individual. As the system infrastructure improves, no one will be able to evade taxes or commit frauds. This is also a boon for honest taxpayers as they do not have to file multiple times.   


Reducing Frauds and Tax Evasion


Most MSMEs/SMEs in India still adhere to pen and paper methods though it has been gradually changing in the last few years. This led to unilateral frauds where under-invoicing or over-invoicing was done only by one of the two people transacting. This has begun to drop drastically as we move to online and digital filing methods. In addition, all registrations under GST are PAN-based. With PAN based registration, the value of total turnover reported in all returns under GST (whether CGST/SGST or IGST), is reported to the Income Tax Department by GSTN. Taxpayers are required to reconcile the amount of total turnover from all returns under GST, to the amount as mentioned in the annual financial returns. Such reconciliation might be asked by Income Tax Authorities during scrutiny or any other proceedings. In the new ITR-3 format, it is required to declare the GSTIN of the taxpayers in the direct taxes return also. This will also reduce frauds. In GST Returns, the taxpayer is required to provide the details of the turnover and the same is being matched with the income tax returns filed. Already few states have issued notices to taxpayers based on the turnovers given in the GST Returns and the Income Tax Returns filed during the last year. In the coming years, businesses will get more vigilant and compliance is likely to increase along with transparency. This has also lead to an increase in the number of new registrations taken under GST by 47, 94,828 during last one year.

Increasing Profitability of Corporate Businesses

As GST has done away with multiple layers, there is an increase in profit for businesses on account of the elimination of check posts. The reduction in the tax rates has also resulted in more spending power for businesses. Not to forget, Businesses who were deprived of the input tax credit on the central excise and service tax area are eligible to take the credit resulting in lower costs.


The tax rates for some of the products have been reduced in November 2017 based on the decisions taken in 23rd GST Council Meeting held on 10th November 2017 on items like office furniture, equipment’s etc., from 28% to 18% resulting in capital expenditure and increase in the EBITA of corporates. This led to an increase in direct tax payout.   


As is obvious, the primary impact of GST has been to begin a series of behavioral changes in the Indian mindset, ferreting out tax frauds and move a traditionally tax evading economy to a tax paying nation. This is not an easy job and will take some time. Once GST settles down and when anti-tax evasion measures are completely in place, the collections will improve further. 


Already, the number of taxpayers registered under the GST has increased from 64,000 to 1.1 crores. What India needs right now is a robust digital assistance infrastructure provided by Government and industry alike which can help in ensuring compliance, make ITR filing processes smooth and hassle free and offer end to end solutions technology solutions.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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goods and service tax

Ankit Agarwal.

Ankit Agarwal is Managing Director of Alankit Limited

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