Who's afraid of GST?

MG Arun
MG ArunJun 19, 2017 | 14:58

Who's afraid of GST?

With the country set to witness the implementation of its largest indirect tax reform, it is but natural to harbour some apprehensions about how it will pan out in the coming days and months. But first, the broad benefits.

Value chain integration

A substantial amount of non compliance happens in the trading section of the value chain, say experts. Following GST implementation, this non-compliance is going to reduce, because traders need to declare more transactions, in order to avail the credits paid earlier.


That’s the transformation aspect about GST, by the very nature of the fact that it integrates the entire value chain for the purpose of taxation. Input tax credit, being the crux of GST, will ensure wider coverage of tax payers in the supply chain.

Input tax credit means that a business can reduce the taxes it has paid on inputs (for instance, materials used in production of a good) from the taxes it has to deposit on output.

Photo: Reuters

As supply from only registered taxpayers will be allowed for input tax credit, businesses and stakeholders will insist on registration of their suppliers and traders — leading to increase in the share of organised participants.

Furthermore, suppliers failing to comply with the timelines of GST returns will see an impact on their compliance rating, says Crisil in a report.

Creation of a common market

The second transformational feature is the abolition of entry tax. “We are one political nation since 1947, but we are not one common market,” VS Krishnan, advisor, Tax Policy Group, EY, said at a recent town hall meeting on GST in Mumbai. It has been estimated that 16 per cent of a truck’s time is spent at check posts. With GST, goods can move freely, and there will be fewer traffic snarls. All the other taxes like luxury tax, entertainment tax, purchase tax have been abolished.


Boost for GDP & export growth

Many studies show that GST will lead to higher economic growth, say experts. If the GDP base moves up, the tax collection also goes up, says DK Joshi, chief economist at Crisil. “We expect fiscal deficit to come down to 0.7 to 1.2 per cent of the GDP in five years,” he adds. If the tax to GDP ratio goes up in the coming years, then it can be said that GST, together with demonetisation has helped. According to him, GST will also lead to export growth. Now, exporters are reimbursed only on excise and customs, and not on central and state taxes. With GST, some of these distortions will be removed, benefiting exporters.

Now, for the major concerns.

Multiplicity of rates

GST comes in several slabs, ranging from zero to 28 per cent taxes. The tax rates are too many, a little away from what could have been ideal. Experience of other economies has been that it’s better to make a start and then make adjustments. There are some countries where they have started with higher rates and then lowered it over a period of time, and some countries such as New Zealand where they started low and scaled up gradually. India can gradually bring in other goods and services into the tax fold, says Joshi.


Producing states vs consuming states

With GST, the poorer states are going to get a far higher revenue growth because they are destination states, or consumption states. The richer states like Maharashtra have said that their revenues are going to be affected. According to Krishnan, since rich manufacturing states are also service tax hubs, what they lose on origin based taxes, they will gain on services. Maharashtra has the big cities of Pune and Mumbai, Karnataka has Bangalore as a service tax hub, and Tamil Nadu has Chennai, so they will be able to neutralise the effect.

Threat of a price rise

In the short term, certain services will end up becoming inflationary as they are going to be taxed high. In rest of the cases, tax incidence is down and price effect will be neutral. However, there is a catch here. Producers are quick to pass on the hike in taxes, but not the tax reductions, leading to profiteering. The country should implement effective anti-profiteering measures if this has to be prevented.

Some argue that GST could end up being deflationary, and prices may actually come down. GST will bring about a reduction in duty on the food side, since, with the abolition of purchase taxes and mandi taxes, farmers are going to be benefitted.

(Courtesy of Mail Today.)

Last updated: June 19, 2017 | 14:58
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