GST could boost average annual GDP growth by 0.4%: IHS Markit


Rajiv Biswas, Asia-Pacific Chief Economist, IHS Markit, tells Business Today that the GST will give a significant boost to India’s medium to long term GDP growth rate.

Q. What will be the immediate effect of GST?

A. The implementation of the GST will result in a significant simplification of India’s current complex system of state-based taxes. Currently there are significant barriers to inter-state trade flows between Indian states, including lengthy delays at state border crossing points due to entry taxes and other tax compliance burdens. These will be eliminated once the GST is implemented, and this could lower Indian logistics costs by over 20 per cent for many manufacturing industries. The GST reform will therefore provide a significant boost to the growth of the Indian logistics industry, which is already growing at a double digit pace, as well as lowering logistics costs for manufacturing companies, improving their competitiveness within India and abroad. The GST will also result in the elimination of a range of other indirect taxes, reducing double taxation.

Q. What will be the long-term impact of GST?

A. When implemented, the GST is expected to lift average annual GDP growth by 0.4 per cent per year over five years, providing a significant boost to India’s medium- to long-term GDP growth rate. The GST will also help to improve the competitiveness of the Indian manufacturing industry by reducing logistics costs and improving competitiveness.

 Q. Any sectors will get maximum benefit from GST?

A. By significantly reducing logistics costs and double taxation, the GST will improve the competitiveness of India as a manufacturing hub and will provide a significant boost to Prime Minister Modi’s ‘Make in India’ policy to attract multinationals to manufacture in India. The GST will also accelerate the development of India’s e-commerce industry by simplifying the taxation regime for online sales nationwide and removing barriers to interstate e-commerce sales.

Q. Have other developing economies gone through similar tax processes such as the GST? How have they handled the transition?

A. Most other developed and developing countries in the world have already implemented a GST system because it improves the efficiency of the taxation system and boosts long-term fiscal revenue collection. Around 160 countries worldwide already have a GST implemented, including around 100 developing countries. The GST is especially successful in developing countries as it strengthens revenue collection from the informal sector of the economy.

One transitional problem that many countries have suffered from when implementing a GST is that it can cause CPI inflation to spike for the first 12 months. However, this is a temporary effect that drops out of the CPI inflation index after 12 months. Moreover, in India’s case the GST is replacing a wide network of state and federal indirect taxes, so the net impact of the GST on CPI inflation is expected to lower prices for many goods and services.

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