Pass GST, untangle India

With the final day of the monsoon session of Parliament held hostage to loud-mouthed politics again on Thursday, a special session to pass the Constitution amendment Bill that will allow the introduction of the goods and services tax (GST) should be considered. The maturity of India’s political environment will be questioned globally if the deadline of April 1, 2016, for introducing the GST is missed.

By implementing GST, a fundamental reform is sought to be made by minimising the shortcomings of the current indirect tax landscape. Multiple indirect taxes with an assortment of taxable events, varying tax rates, differing compliance requirements and tax cascading are some of the inadequacies in the current regime.

Multiple Symptoms

It also suffers from other constrains such as complexities of determining the nature of transaction (sale or service), lack of uniformity in classification principles and complexities in tax administration.

GST shall subsume several taxes operating at the central and state levels into a nationwide comprehensive tax regime. It is expected to integrate goods and services taxes across all supply chains and capture value addition at each stage. GST is likely to have a seamless credit chain, which should lead to the removal of a ‘tax on tax’, or tax cascading, which has been one of the primary causes of distortion in our taxation structure.

A continuous chain of set-off is expected to be established from the original producer or service provider’s level to that of the retailer. This would eliminate cascading effects, making the cost of production lower, giving businesses an opportunity to evaluate pricing policies. A GST regime should result in production efficiencies that could raise profitability and GDP. Which makes its passage crucial and above the incredibly raucous partisan politics that we have been witnessing in Parliament.

Bands of tax rates for commodities will bring consistency, although it would have been preferable that tax rates were standard across states. Compliance should be simpler with uniformity sought to be introduced.

Under the present indirect tax regime, exports are subject to zero rate of tax, and although business and trading communities are eligible for refund of most taxes paid on intermediate purchases, tax leakages exist that add to the cost of goods, making exports from India less competitive globally. Under the proposed GST regime, exports would continue to be subject to zero rate of tax.

Due to the seamless credit in the supply chain, the cost of production and prices of exports from India should reduce. This would consequently enhance competitiveness of Indian exporters in the global market.

The 13th Finance Commission, along with the National Council for Applied Economics and Research (NCAER), had carried out a study to analyse the impact of India’s growth and international trade on the implementation of GST in December 2009. The study reported that on GST’s implementation, India’s GDP would increase 0.9-1.7% in the medium term.

The experiences of countries such as Canada, Australia and New Zealand on the implementation of destination-based consumption tax (similar to the proposed GST in India) has been documented in a 2004 paper by Tom Bolton and Brian Dollery of the University of New England, Australia (‘An Empirical Note on the Comparative Macroeconomic Effects of GST in Australia, Canada and New Zealand’). It states that “not only was the GST highly successful in raising tax revenues, but it was also significant in terms of growth effects, price effects, current account effects and the effect on the budget balance”

Make GST, Make in India

Since coming to power, the new government’s growth agenda has included reviving the manufacturing sector and increasing its share in GDP from 16% to 25%. With an emphasis to achieve this objective, the government introduced several initiatives including ‘Make in India’, ‘Skill India’ and ‘Digital India’.

Subsequent to the launch of the ‘Make in India’ initiative, global investors from Taiwan, Germany, the US, Japan, South Korea and China are proposing to set up new manufacturing facilities, or expand their existing facilities in India. The introduction of GST provides an opportunity to relook at pricing models and evaluate opportunities in India.

Aclose comparison of the initiatives of the new government and the proposed GST will make it evident that both are aligned and complimentary. An earnest implementation of the initiatives coupled with an efficient GST can fuel real development.

But its passage is more than just about the government’s policy plans succeeding. With its anticipated macroeconomic effects on economic growth, it is a milestone to be seized. Its implementation is essential to make India’s growth story a success. In its absence, the plans of making manufacturing the engine of the Indian economy can be stifled.