GST: HISTORY BECKONS!
Goods & Services Tax (GST), a much awaited reform is, in fact, the most ambitious tax reform attempted in India and perhaps the world. It will transform India into one single market for goods and services with a unified tax regime. However, it took us over a decade and several missed deadlines to see this reform come to fruition. Otto Von Bismarck was on the mark when he said, 'Laws are like sausages, it is better not to see them being made.'
Currently, India has a complex indirect tax system, characterised by multiple taxes levied by the Centre, states and local bodies. The tax base is not uniform and further cascading of taxes is a major issue. Tax already paid on inputs is not always adjusted for while levying a tax on the final output. This results in double-taxation. Another issue is that interstate transactions are taxed separately and no input tax credit is available. Consequently, firms often restrict their transactions to within a state, which has led to fragmented markets.
GST : AN IMPROVEMENT OVER EXISTING FRAMEWORK
A multitude of Centre and state-level taxes would be subsumed under GST, making it a simpler tax framework.
The Centre and states would levy a uniform GST rate on a common base of goods and services, ensuring a uniform tax base.
Input tax credit would be available at each stage which will help eliminate the issue of tax cascading. Interstate transactions will be tax-neutral.
Producers and dealers are likely to be more particular about invoicing each transaction to avail input tax credit which will improve tax compliance and collection.
For the Consumer
The average GST rate is expected to be lower at around 18-20% as compared to a much higher total indirect tax burden currently borne by consumers. As a result, consumers would have more disposable income.
However, there will be a differentiated impact on the consumer depending on his individual consumption basket. If the basket comprises more services than initially, prices will go up as services will be taxed at a higher rate of ~18% as against the current~15%. Secondly, most services have an element of complete pass-through and hence, the consumer will feel the pinch immediately.
However, once efficiencies kick in and the system matures, the consumer will be better off.
Decisions of firms would become more efficient as GST paves the way for a national market for goods and services. Over the long term, companies will benefit through unification of market, simplified indirect tax regime and there will be lower warehousing costs for most companies. An important element of GST will be that it will make the informal sector non-competitive as compared to the formal sector by taking away the ‘’Tax arbitrage’’ advantage. This will result in higher volumes for the organised players such as your own company over a period of time.
For the Country
A lot of studies peg the boost to GDP at 1-2% over time-based assumptions of tax rates, inclusion and exclusion of key goods and services and swift implementation. The boost to economic activity will happen as consumers - benefiting from a lower tax burden – will have a higher propensity to consume, which will kick start the virtuous cycle of higher spending, higher investments by companies, job creation and higher GDP growth.
The government’s tax kitty will also get a boost and hence tax/GDP ratio will likely rise with higher compliance, especially in the informal sector. Additionally, exports will be “zero-rated”, which will improve India’s trade competiveness.
The state GST bills will now need to be cleared by at least 50% of the states. The GST council will need to freeze the final rates for various categories of goods and services if we are to stick to the final roll-out date of July 1, 2017.
History beckons India and we look forward to being part of this new chapter in India’s growth!
Dr. Sachchidanand Shukla
VP and Chief Economist
Group Strategy Office
Mahindra & Mahindra Ltd.