As the Rajya Sabha prepares to pass the constitutional amendment paving the way for the goods and services tax (GST), the reform is expected to bump up GDP.
The GST Advantage
As the Rajya Sabha prepares to pass the constitutional amendment paving the way for the goods and services tax (GST), the reform is expected to bump up GDP by about a percentage point or even more. Here’s a look at GST’s benefits.
1. Life gets simpler
GST will replace 17 indirect tax levies and compliance costs will fall
2. Revenue will get a boost
– Evasion set to drop – Input tax credit will encourage suppliers to pay taxes – States and Centre will have dual oversight – The number of tax-exempt goods will decline
3. A common market
It’s currently fragmented along state lines, pushing costs up 20-30%
4. Logistics, inventory costs will fall
Checks at state borders slow movement of trucks. In India, they travel 280 km a day?? compared with 800 km in the US
5. Investment boost
For many capital goods, input tax credit is not available. Full input tax credit under GST will mean a 12-14% drop in the cost of capital goods. Expected: A 6% rise in capital goods investment, 2% overall.
6. Make in India
a) Manufacturing will get more competitive as GST addresses cascading of tax, inter-state tax, high logistics costs and fragmented market b) Increased protection from imports as GST provides for appropriate countervailing duty.
Also read: GST impact across sectors: Take a look at the winners and losers
7. Less developed states get a lift
The current 2% inter-state levy means production is kept within a state. Under the GST national market, this can be dispersed, creating opportunities for others
8. Manufactured goods could become cheaper Lower logistics and tax costs
9. GDP lift HSBC estimates an 80 basis point rise in GDP growth over 3-5 years. NCAER pegs this at 0.9-1.7% thanks to the elimination of tax cascading
10. Freeing up online State restrictions and levies have complicated ecommerce. Some sellers do not even ship to particular states. All this will end with GST
Potential Pitfalls Once the Upper House passes the amendment, there’s a long way to go and much work to be done before the government’s April 1, 2017, deadline can be met. Factors that could trip up GST:
– The actual regime may not be the best possible – Too many exemptions could undermine the levy – Goods like petroleum, alcohol and tobacco may be excluded – A high tax rate would stoke inflation as service taxes will rise more steeply – Fiscal stress if expected collection efficiency doesn’t materialize early