JOIN USThe Lok Sabha approved the Goods and Services (GST) Bill on August 8 after the Rajya Sabha cleared the path by approving the Constitution (122nd Amendment) Bill by more than two-third majority. It had been a decade-long struggle to pass the Bill after it was first mentioned in the FY 2006-07 Budget.
If one looks at the benefits, first, the GST will be a unified destination based tax that will subsume a plethora of indirect taxes (excise, service, customs tax etc, of the Centre; VAT, luxury tax, entertainment tax of state and inter-state taxes like Central sales tax and entry tax). The GST will simplify the existing indirect tax structure with multiple rates and large exemptions – 300% for Central excise and 90% for state VAT. It will increase transparency by removing cascading of taxes as it will allow tax credit set off at each stage of production.
Second, the current tax regime does not allow tax credits for inter-state transactions creating borders within the country. As the GST will subsume all state taxes, it will lead to dismantling of the network of checkpoints and enable seamless movement of goods across state borders. It is reported that trucks spend around 60% of the time to travel between key Indian cities idling at multiple checkpoints.
Truck drivers clock an average of 250-280 km per day much below the world average of 400 km per day and 700 km per day in USA imposing transaction costs of billions of dollars annually on the businesses. The dream of border-less transactions across states will become a reality with GST improving the supply chain efficiency.
Third, tax credit at each stage will result in better invoicing and self-policing. Increased compliance, simplified tax regime and reduced exemptions will broaden tax base, lessen corruption and increase tax revenue collection. Fourth, as GST will be a destination-based tax, the tax rate on exports will be close to zero, thus increasing export competitiveness. It is expected to help promote government’s “Make in India” programme and improve India’s ranking in ‘ease of doing business.’
In the short run, the GST may have a mixed impact. Higher taxes on services and no immediate pass-through of lower taxes on goods to consumers may hurt consumption and hence, growth. But medium to long term, we will see productivity gains through efficient tax system and removal of inter-state hurdles that will boost growth through investments. The NCAER estimates that growth will increase by 0.9% to 1.7%, while the Finance Ministry report estimates a minimum boost of 0.5%.
Inflation may rise marginally at the standard rate of 18%. It is assumed that impact on headline CPI inflation may vary between 20-70bps based on final GST rate. But it will be a one-time impact and in the long term, lower tax and increased productivity would lead to softer inflation. The GST rate is expected to be fiscally neutral for the government. However, it is observed in some economies that revenue collections did move up after the implementation of GST.
The way forward
Even though the enabling legislature has been passed by both the Houses of Parliament, much groundwork needs to be covered before its final implementation. The bill has to be ratified by 50% of the state assemblies as it is a constitutional amendment. There is a high probability that the bill will get passed by the required states within the next couple of months as there are already 12 BJP-ruled states in the country and most of the states are consumption driven which stand to gain by GST.
Next, the GST Council consisting of Union finance minister and state finance ministers will decide crucial issues like GST rate, thresholds and exempted list. The neg-otiations will be tricky as each state will want a tax rate that will lead to higher revenues while trying to balance the national interest.
The Council will be a fine example of cooperative federalism with each state acting as an equal partner with the Centre. The GST Committee had recommended a three-tier tax rate – a low rate of 12% for essential items, a standard 17-18% rate for most products and a high rate of 40% for luxury goods.
The GST Bill, after being finalised by the Council, will have to be passed by parliament and state legislatures. The opposition parties in Rajya Sabha, while passing the enabling legislature, demanded an assurance that these bills will be brought as finance bills and not as money bills. A money bill, once passed in Lok Sabha, cannot be rejected or amended in Rajya Sabha. On the other hand, a finance bill needs to be passed in both the Houses to become law. So the Congress, which has majority in Rajya Sabha, would like to see the GST bills introduced as finance bills. This must be completed by end-December for GST to be rolled out from April 1, 2017.
Finally, the backbone IT infrastructure connecting tax databases of different states and the Centre should be in place before it can be rolled out. There will be a single portal for all tax related processes. The government has already set up the GST Network (GSTN), a not-for-profit entity, which is being developed by Infosys. According to media reports, it is in advance stage with test runs expected to start from October 2016 and launch of the portal in February 2017.
The passage of the GST bill is a testimony of the government’s ability to build consensus across party lines. It showed Indian Parliament at its best. Instead of usual strong consensus for weak reforms, for once we saw genuine political willingness for strong reform.
(The writer is Visiting Fellow, PIF; research scholar, IIFT and adviser, Policy Monk)