Reality about GST: Why we shouldn't expect revolutionary economic changes

The GST appears to be moving closer to becoming a reality with the new draft law being put for discussion. This is useful as we are clear of the direction and more importantly the eventuality of the same. This has to go through Parliament and then the legislatures of states have to pass the same, which presumably will only be routine stuff.

For the record, 50% of these legislatures have to pass this bill. Presently the Lok Sabha has passed the Bill and the Rajya Sabha is now expected to do the same. The delay so far appears to have been driven more by politics rather than economics, considering that the Subramanian panel had earlier provided the contours of options which had to be discussed.

 Reality about GST: Why we shouldnt expect revolutionary economic changes


The GST will mean a single tax rate across the board for all goods and services and while it may not be singular in the sense that there could be three or four slabs depending on the grade of the good involved, an average of 17-18% would more likely be the one pitched for. The ranges have varied from 12% to 40% depending on being essentials or sin products.

The more important issue is that the grievance which states had on compensation as producer states could be susceptible to revenue losses. There is less clarity on whether there will be an additional 1% levy for states in this category. Tamil Nadu’s intransigence is based on clarity on this point.

How will the GST change things around us? The GST is essentially an efficiency enhancing tool that reduces the number of filings that have to be made which simplifies processes and reduces the scope for corruption.

Corporates will benefit to a large extent while the smaller players will come under the fold as those with turnover of above Rs 10 lakhs as well as ecommerce companies which have to pay tax at source. This is an efficient system and has proved to be successful in most countries that have implemented this concept.

From the economic standpoint, a few issues linger for further debate.

The first pertains to inflation. The single rate that will be applied cannot possibly be a balanced number given the plethora of goods and services that are taxed today. Services will end up becoming more expensive if the rate moves to 18%, which will be an additional cost for all households.

While the objective is to have a revenue neutral rate, this may be a challenge for the system to achieve given these complexities. This is particularly so because a lower rate on several non-consumer goods do not always result in lower prices at the consumer end. Hence the final impact on prices has to be watched and monitored carefully and to begin with there would be some distortions from the current equilibrium

Second would be the impact on GDP. There are several studies which show that GDP will increase by 1-1.5%. Does this mean that from a level of 7.6% which we achieved in 2015-16, GST would have made the number 9.1%? This is debatable because GDP is the sum total of all goods and service produced in the country and unless more goods are produced due to the introduction of GST, only then will GDP increase.

Presently supplies have followed demand and we have never had a situation where companies have not produced what is required at the consumption end because taxes were inefficient. However, this has kept goods expensive.

However, if prices come down sharply due to lower rates or efficiencies at the production end, there will definitely be an increase in demand for such goods leading to higher production. Hence, the crux is having lower prices through this revenue neutral rate being imposed by the Centre and states.

Third, a transparent and easy system definitely will help bring more producers into the fold on a voluntary basis. While the floor has been set at Rs 10 lakhs, given the rather loose accounting practices, several small producers would anyway be out of the net and may not be willing to join and pay the tax.

However, those who have been deterred in the past on account of the complexity could enter the stream and add to both revenue as well as GDP growth by such revelation (these would not have been included in the calculation as their returns would not exist with the tax department).

Fourth, the IT systems need to be in place to handle such transaction. While it is officially stated that the structures are in place, a single tax rate being imposed across the country will challenge the way in which it is collected and then distributed across the states and Centre.

What does all this amount to? Most importantly this major reform which is required is going to be a reality soon. This will complement the efforts put in by the government to enhance the ease of doing business in India. This can happen by April 2017 or later, as the states too have to pass these acts.

We should not expect any revolutionary changes in the way in which the economy functions as we are only tinkering with rates and making life easy for companies. The concept of a revenue neutral rate means that the government is not giving up any revenue. Hence if soap becomes cheaper, our shampoo may become more expensive. For services, we should be prepared to pay more.

Will it be a smooth transition? Probably not as this is the first time we are attempting the same, and the collection and redistribution will be a task which the government appears to be geared up for. But most certainly, this will mean less demand for people to handle these transactions, and there will be surplus staff to be redeployed.

This will be a fallout that has to be buffered in. On the whole it will be commendable once we get in GST as it has meant dealing with all the contradictions which envelopes democracies where real politick is an integral part.

The author is chief economist, CARE Ratings. Views are personal

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Updated Date: Jun 15, 2016 16:15:10 IST