Expectations from the GST

There are widespread expectations from the implementation of the GST and people are awaiting the outcome. There is however no doubt on the GST reform and the betterment it will augur for the economy. The worry is that people are expecting a bit too much when there are changes already proposed in the GST framework. Let us have a look at the realities.

GST will subsume a number of taxes: The GST in its original form was likely to do that, but with the changes that have happened in the last one year have changed the direction. The number of taxes and duties will come down but we will still have seven of them. These are CGST, SGST, IGST, 1% special tax, Petroleum, tobacco and alcohol tax, electricity duty, and basic customs duty on imports. The government is doing one good thing by combining the CGST, SGST, IGST and the 1% tax under the same challan. This will help reduce the variants that the businesses have to tackle.

GST will lead to GDP growth: There is no evidence to support the theory that an indirect tax reform can lead to the high growth trajectory for an economy. Australia, New Zealand, Thailand and Canada can be taken as examples of the economies which have implemented the GST in the past. Out of the four only New Zealand recorded a growth in the GDP while the others saw a drop after the introduction. In New Zealand also, it was a combination of factors and not the GST alone which contributed to the GDP improvement. The figures of 1-2% GDP growth in the Indian economy due the implement of GST may prove out to be a misnomer.

GST will curb inflation: With the GST implementation, the cascading of taxes is controlled. The revenue loss due to different taxes against which input credit cannot be claimed are eliminated or reduced. Also in the four countries mentioned above there was a curb on inflation after the introduction of GST. The most important thing here is the rate at which the GST is applied. The revenue neutral rate has been worked out at 18 per cent in India. This rate of GST will cause the goods to become cheaper, while the services will become costlier. This is because the indirect taxes in goods work out at 24 per cent at present while on the services it is 14 per cent. If the GST rate is pegged at 25 per cent or higher the goods and services will become costlier causing the inflation to rise.

One must understand that any economic reform has its positives and negatives. By spreading baseless rumours about the achievements possible with GST without making the underlying assumptions clear will be like building castles in the air. It would be better if the GST is brought out of the ambit of political parties and debated upon by the experts drawn from the various sectors that will be impacted by the GST implementation. This exercise will help in eliminating the roadblocks in implementation and making amends before the roll-out. The result will be a smooth implementation of the GST.

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