New GST worry: Measuring GDP growth without past tax collection data

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CSO may have to rely on approximations for growth calculations in the next four quarters given the indirect tax system’s overhaul under GST

Two months after it kicked-in, Goods and Services Tax (GST) is giving a new headache.

How do you measure changes in India’s gross domestic product (GDP) in the absence of past tax collection data? This question has been bothering official statisticians ever since GST rolled out from July 1.

GST has consolidated a welter of local and central levies such as value added tax, excise and service tax into a single levy. This has made inter-period tax collections difficult to compare.

India has moved to a gross value added (GVA)-based accounting system for national accounts and GDP since 2014.

 GDP, by definition, is the total value of goods and services produced in the country. GVA, on other hand, is GDP minus taxes. It serves as a more realistic proxy to measure changes in the aggregate value seen through the prism of cost of production.

The indirect tax overhaul because of GST, however, has meant that the central statistics office (CSO) will have to rely on approximations to put out the GDP calculations for at least the next four quarters.

Also read: GDP expands at 7.1% in FY17, but slows to 6.1% in Q4 as demonetisation bites

Officials, who did not wish to be identified, told Moneycontrol that the GDP growth figures for the next four quarters beginning July-September 2017 may go through major revisions after the national accounts are updated later, factoring in actual GST tax collection numbers.

The government expects GST tax collection data to be available seamlessly from October once the teething return-filing problems are ironed out.

While statisticians should be able to factor in this data from the January-March 2017 quarter, it will still have to rely on approximations for growth comparisons, until full year indirect tax collection estimates are available.

Indirect tax collections can sometimes magnify or hammer down GDP growth. For instance, according to CSO, India’s “real” or inflation-adjusted GDP grew at 7.1 percent in 2016-17.  GVA, however, grew 6.6 percent in 2016-17—suggesting that expansion is slower than what the headline GDP numbers suggest.

The effect of the currency recall in November-December 2016 and the resultant slowdown in consumption and investment may well have been hiding in the slower GVA growth estimates compared to GDP in 2016-17.

Higher indirect tax collections in 2016-17 may also partly explain the more bullish GDP growth forecasts compared to GVA.

Besides, the input tax credit (ITC) system under GST that allows a producer or trader to reduce the tax already paid on inputs will also make GDP growth comparisons difficult in the coming quarters.

While ITC also existed during the value added tax (VAT) system, its scope has now been widened significantly in GST.

Officials also said that GST’s inflationary impact is still unknown. CSO gives out both the “real” or inflation-adjusted GDP figures as well as the nominal or current price numbers. GST’s rollout and the subsequent revision in inflation data may force alternation in the “GDP deflator” that statisticians use to compute price-adjusted national income numbers.

GDP estimates and growth projections are critical for policy making. These also serve as vital inputs for the Reserve Bank of India’s (RBI’s) interest rate related decisions.

Source: http://www.moneycontrol.com/news/business/economy/new-gst-worry-measuring-gdp-growth-without-past-tax-collection-data-2370129.html

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