GST – Impact on Indian Economy

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There is a lot of expectation from the Indian government with regard to the introduction of the Goods and Services Tax, or GST. Currently we have the Value Added Tax applicable only on the goods, and Service Tax that is imposed on select services. GST is an attempt to combine them under a common head. Also, it intends to do away with multiple taxes at the state and central level which complicate the business requirements.

The GST reform is expected to bring in a lot of changes. We are at present struggling with widening of the tax base. By the introduction of service tax and enhancing its coverage of services subsequently, the government was able to widen its tax collection base to a certain extent. It has prompted the government for reduction in the distortions in the economy and to introduce a more comprehensive input tax credit through the GST.

There is also a need for strengthening our export competitiveness. Of late, there has been a decline in our exports. Despite the fact that imports have come down due to a fall in the prices of crude oil, our trade balance has always been negative. With the GST introduction, the government wants to comprehensively relieve domestic consumption taxes on exports. It means that you can expect a zero-rate structure on exports,while the imports will carry the taxes like other domestic goods by sticking to the destination principle. This would be an entirely different approach than the current method of selectively giving duty cuts and tax reliefs to items in order to boost exports.

The inter-state barriers are impediments in the seamless national marketing for goods. Each of the state has its own tax structure. The GST which is a destination based tax proposes to do away with the inter-state Sales Tax. The GST reform is an attempt to simplify and harmonize the tax structure. This will significantly lower the compliance cost for tax payers and also make its administration uniform across the states. The biggest advantage is expected in the form of a reduction in the overall tax burden on goods which under current estimations stands around 25 to 30%.

The GST bill, which was introduced in the LokSabha in the end of 2014, is a proposal for the One hundred and twenty second amendment in the Constitution of India. It has been passed in the LokSabha on 6th of May 2015 and is pending in the RajyaSabha. Since India is a Federal Republic the GST is proposed to be implemented in a dual structure, by the central and state governments concurrently. It implies that we will have a Central GST and the State GST.

Getting the Centre, the 29 states and two Union territories with legislatures under a single umbrella is a tall order. There are bound to be differences, given the structure of economy and sales tax revenue and separate interests of the states. The government at the Centre is pushing it, by giving sops to the state governments. Let us believe in the saying “Where there is a will, there is a way.”

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