GST rollout good for manufacturing but not services: Ambit

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The ambitious goods and services tax (GST), which the NDA government is trying to push through, is not as revolutionary as is widely believed and its impact on economic growth, as proposed in its current form, will be mixed at best.

Moneycontrol Bureau

The ambitious goods and services tax (GST), which the NDA government is trying to push through, is not as revolutionary as is widely believed and its impact on economic growth, as proposed in its current form, will be mixed at best.

That’s the conclusion of a report by brokerage firm Ambit, which says that while the tax reform — “overhyped and misunderstood”, according to it — may bump up the country’s tax-to-GDP ratio, inhibit inflation to an extent, as well as streamline the country’s complicated tax system, it was unlikely to boost GDP growth in a major way.

The tax may also prove to be a boon for the manufacturing sector but may adversely impact the services sector.

Aiming to replace almost all central- and state-level taxes, the GST is expected to solve several problems that plague India’s taxation system.

Chief of these are differential tax levels in different states that hamper intra-country trade as well as solve the problem of cascading of taxes, or tax on tax (tax being levied on input as well as output — a problem that was solved somewhat with the introduction of the value added tax, which allows for a rebate on the input).

But the Ambit report says that while these problems will be taken care of (though not entirely since states have insisted that lucrative products such as alcohol, petroleum and tobacco products be kept out of its ambit), it questions whether these would be enough to actually impact the country’s growth rate.

“Cross-country experience points to no direct correlation between indirect tax reform and GDP growth,” the report notes. ” Whilst GDP growth in New Zealand was higher post GST implementation, in the case of Canada, Australia as well as Thailand, GDP growth was lower post GST implementation.”

In fact, there is a risk that GDP growth may be affected adversely in the short run by a 1 percent inter-state tax, which has been recommended to compensate producing states.

“This is likely to result in distortions that have the potential of eating into the small gains created by a unified GST in the early years,” says Ambit.

The report then envisages two different GST rates — one at the current expected 18 percent “revenue neutral rate”, and another at a higher 25 percent rate — and outlines the impact each could have on the economy.

“At 18 percent, there will be no incremental gain in tax revenues for the government. Also, a GST of 18 percent will be positive for goods, as currently the effective tax rate on most goods is approximately 24 percent. However, it will negatively hurt services consumption, as currently the service tax rate is 14 percent,” it says.

But the report adds that a 25 percent GST rate could actually be beneficial in some other ways: such as boosting the tax-to-GDP ratio by 1-2 percent, which could allow the government to spend more on capital expenditure, which in turn would boost growth.

But assuming an 18 percent GST come through eventually, it also has a number of investment implications. Services, which currently enjoy an average 14 percent tax rate, will be likely hurt. Goods such as FMCG, auto, cement etc where the tax rate are currently anywhere between 24-38 percent will get a boost.

Finally, GST can benefit organized players if it is “able to capture the unorganised sector in the tax net and enjoys a cost advantage of 13-30 percent”.

“As a result, in the goods sectors in which unorganised accounts for the majority of the market share (e.g. light electricals, paints, pipes and plyboards), the organised players stand to be benefit regardless of the rate at which GST is introduced,” according to the report.

 

Source: Moneycontrol

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