On Friday midnight, President Pranab Mukherjee and Prime Minister Narendra Modi launched the Goods and Services Tax (GST), India’s biggest indirect tax reform in Parliament hall.
Beginning today, India will cease to exist as a fractured economic union of 29 states and seven union territories and will become an economy with uniform tax rates for specific group of goods and services across the country. For a company operating pan-India, GST - the biggest indirect tax reform since independence will break the barrier of tax regimes that existed in different states. It will club a host of central and state levies and replace them with a single destination-based tax system.
In simple terms, this would mean that tax need not paid at each stage of manufacturing and retailing, but only at the destination. Tax paid at earlier stages can be claimed by as input credit.
For the common man, GST is unlikely to come as a price shocker since the burden of cascading rates will disappear. The prices of majority of goods used daily by the masses will come down. These will include food items -- fresh meat, fish, chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi, sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom, etc. Majority of the goods (about 81 percent of the total) will be under the 18 percent slab while remaining will come under 5 percent, 12 percent, and 28 percent slabs. Additional cess will be levied on luxury goods. Rough diamonds will be taxed at 0.25 percent rate and gold at 3 percent. With multiple tax slabs and cess and exceptions, GST is far from perfect and not a simple structure as countries with a flat GST rate structure.
For industries, the impact on their businesses will be mixed. One needs to wait and watch how this is going to ultimately play out. The companies are still busy preparing the price changes on their products in the GST regime. Some FMCG firms like Dabur, has already expressed concerns of likely loss in their revenues post-GST roll out. The service industry may have some pain ahead since hike in service tax (from 15 percent to 18 percent) will be a turn off for customers. There is also confusion with respect to claim of input credits. The initial hiccups will be many and it is imperative for the government to set up dedicated offices in each state to address grievances and offer clarifications to traders. While bigger businesses with deep pockets and resources are more or less prepared to migrate to the new regime, small businesses may have a tough time to comply. Many of the tiny business units that operate without even a computer to do accounting will have to invest and hire a chartered accountant’s service to comply with the new regime.
Big boost for economy
For the economy, the GST will offer gains in the long-term, with economists projecting 0.5 percent to one percent upside to the economy. With GST becoming a reality, India will join the club of several developed economies in the world with a uniform tax structure. Some 159 countries in the world are GST-compliant. More importantly, the passage of GST will show the world that India has finally broken out of the reforms jinx and is ready for its next round of big reforms.
Incidentally, the GST launch coincides with a slew of other key reform steps such as decision to privatize national air carrier Air India, introduction of insolvency and bankruptcy code and major subsidy rationalization exercise using the direct benefit transfer model. The introduction of GST and the simpler tax regime it promises will appeal to foreign investors looking at India — an idea Prime Minister Narendra Modi has been hard-selling to foreigners for long.
Big political win for Modi
Though the GST is a big political win for Narendra Modi, the political blame game is already on. The latest salvo was fired by Congress vice president Rahul Gandhi hours ahead of the launch. In a series of tweets, Gandhi said GST is a half-baked idea and came down heavily on the government for self-promotion. In the days ahead, as nation goes through the initial pain of transition to the new tax regime, Modi government can expect more attacks from a united opposition. The signals are already clear with Congress party and Trinamool Congress not participating in the launch function. But, as mentioned in an earlier piece, the Congress party doesn’t have strong reasons to show the world for its last minute fight with BJP on the GST launch, after being party to the GST-decision making process all along.
Credit goes to Narendra Modi and finance minister Arun Jaitley to get the critical political consensus, mainly from the Congress party which is needed to go ahead with Project GST. Lack of political consensus has been the biggest hurdle for GST ever since the idea was first debated in India almost one and half decades back. GST was delayed, caught badly in the political tussle during the UPA-regime. Interestingly Narendra Modi, when he was the Gujarat Chief Minister, too, had opposed GST at some point. This has been one of the key arguments of the Congress party to take on the prime minister in Parliament when the NDA-government pushed for GST this time around. From that point, convincing the Congress party to agree for the crucial constitutional amendment leading to GST roll out, has been a big political victory for the Modi camp.
Implementation is the key
The mega launch is over. Once the hype settles down, the government machinery will have to work overnight for the next few months at least to facilitate a smooth transition. The government has given relaxation till September for companies to comply with the new rules. But the big disruption will happen not among big companies but small businesses, which are largely in the informal sector. One cannot thus rule out job losses and panic reactions in this segment.
The GST launch sans implementation plan can backfire for the Modi government in the months ahead. Expectations of benefits are sky-high among the public from the new tax regime. The government would do well to tread cautiously as the roll out is likely to be a major disruptor for both big and small industries. Immediate follow-up actions to bring awareness and facilitate the transition must be carried out at state levels.
One big question is whether there are enough dispute institutional mechanisms when the GST is rolled out and companies work on invoices and tax credits. The key point here is that dedicated offices must be set up to address grievances and clarify rules for small entrepreneurs. Already, there are concerns among small businesses about the transition process. The government will have to work overtime to ensure that GST roll out doesn’t become a repeat of post-demonetisation chaos. The likely adverse outcome of GST could include increase in compliance cost for small entrepreneurs. Many of them may choose to shut shops resulting in job losses.
But the bottomline is this: No matter what the initial hiccups and the political debate on the timing and preparedness, the passage of GST marks an important chapter in the history of Indian economy. Its long-term gains are certain.
Updated Date: Jul 01, 2017 00:47 AM