Why are we talking about GST? GST (goods and services tax) is animportant structural reform and constitutes the next step towards unifying allindirect taxes in India. This had been long delayed since its initial proposedlaunch in Apr-10 due to difficulty in arriving at a consensus with the statesregarding applicable rate, exemptions, centre state shares, compensation etc.The government in the last Union Budget had indicated the timeline forimplementation of GST by Apr-16.
One step forward… The committee headed by the Chief Economic AdviserDr. Arvind Subramanian on ‘Possible Tax rates under GST’ submitted itsreport to the Finance Minister on Friday. Accordingly, the committee hasrecommended a revenue neutral rate (RNR) in the range of 15-15.5% (Centreand states combined) with standard rates varying between 17-18%. The panelalso recommended eliminating all taxes on inter-state trade (including the 1%additional duty) and replacing them by one GST. It also recommends bringingalcohol, real estate, electricity and petroleum within the scope of GST.
Details on the next page). It needs to be noted that these are justrecommendations and the final GST structure (applicable tax rate, goods andservices exempted, etc) will be decided in discussion with the Centre andGST council.
…but sticking to Apr-16 deadline for GST implementation still looksdifficult: While the proposed GST rate is a step in the right direction and willsupport government’s effort to reach a consensus with the opposition whichhad called for GST rate at the recommended level, its implementation by Apr-16 still looks difficult, in our view. The constitutional amendment bill, whichrequires a two-thirds majority in parliament, needs to be approved by theupper house of the parliament. In addition, at least half of the stateassemblies will have to pass the bill. We believe even as consensus isreached between the Centre and states, complexities involved in finalising thestructure and operational aspects of the new tax regime might delay theimplementation of GST on a pan-India basis to Apr-17.
Impact on growth - short-term neutral, medium- term positive: Webelieve the impact on the tax revenue collections and/or overall economy inthe short-term will not be much as both the private sector and the governmentadjust with the complexity and lags in GST implementation. However, thebenefits of implementing GST are expected to be meaningful in the mediumterm.
It will help create a uniform national market, improve the businessclimate, reduce the cost of doing business, increase efficiency and boostoverall productivity. The increased revenue mobilization will also help tocreate additional fiscal space which could be used to boost government’scapital expenditure and provide an investment stimulus to the economythereby contributing to higher economic growth. According to our estimates,implementation of a comprehensive GST across goods and services isexpected, ceteris paribus, to add 0.7-1.2% to India’s GDP in the medium term.
Impact on inflation – services up, manufacturing down – largely limited:GST will impact around one-third of the CPI basket. Building in proposedstandard GST rate at 17-18%, we believe services will see a rise in the tax(contd..)
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