GST: A game changer for India’s economy

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Arun jaitley press conference9

The Goods and Services Tax (GST) Council met in Srinagar to finalize the rates of taxes and there was total unanimity among the members of the council about the rates fixed. The new indirect tax regime will be operational from July 1 this year bringing the whole country in one tax bracket. The GST Council comprises of finance ministers of states as well as union territories. The Council which met in Srinagar has fixed the rates for different categories of goods and services. It has fixed rates for 1205 items which will be levied at multiple rates ranging from zero to 28 percent.

There is a political meaning to the choosing of Srinagar as the venue for the GST Council meet. The announcement of the GST rates from Jammu and Kashmir, a state enjoying special status in the country, indicates that the era of one nation, one tax, one bazaar has finally arrived, perhaps paving the way for uniform civil code in future or removal of Article 370 of the Constitution which gives special status to the state.

A message has also been sent across the world that the troubled state of Jammu and Kashmir has thrown its weight around to accept the new tax regime, apart from the fact that the whole country is unanimous in accepting it. After the roll out of the new tax regime, India is going to become a perfect place to do business as any anomaly about taxes will be history. The foreign investors can invest freely as risk factor will be remarkably reduced.

Goods and Services Tax is believed to be a game changer for India’s economy, a big achievement for Narendra Modi government. The government was successful in bringing about a consensus on the GST as the concept was mooted and discussed for the last 17 years, in spite of the fact that government did not enjoy majority in the upper house of the parliament. Congress can also take some credit for the passage of the constitutional amendment bill which was necessary for the GST to become a law, but it was Narendra Modi government which showed its political will to make it happen leaving far behind previous Congress governments.

India is soon going to be one nation, one tax and one market country with GST replacing 17 different layers of complex taxation both at the states and central level. The price of a product will be the same anywhere in the country from July 1. This will benefit not only the buyers but the sellers also as the whole country will be a single market.
After the marathon meeting of the GST Council in Srinagar, it was unanimously decided that no tax will be levied on food grains and agriculture produce. However, items of daily use like toothpaste, soap, hair oil will be little more expensive. Essential items like milk and milk products have also been kept out of the purview of GST, bringing good news to the millions of people in the country. Small cars will be expensive and big cars will be cheaper. Coal will come under 5 % tax slab, fuelling a growth in power generation and steel industry. The GST Council categorised 1205 items under different tax slabs. GST rates are likely to have some impact on the consumers initially but as the time passes on, the prices will stabilize in a couple of months. As the whole country is going to become one market, there is likely to be a boost in business, services and manufacturing sector. This will facilitate ease of doing business because there will be only one simple tax structure in place instead of various categories of complex taxes, bringing transparency in the taxation system of the country.

GST is likely to bring in more revenue to the kitties of both central and state governments, which is likely to spur investments in future as the government will have more money to spend. According to one estimate there is likely to be an increase of 32 to 34 percent more revenue for the government, higher than what government used to get earlier. Apart from the revenue gain for the government, GST is likely to further strengthen the economy which is good for the business. There is likely to be less tax evasion and more tax collection, increasing the income of the government by a few notches.

After the implementation of GST, Indian products will compete at international level, which is likely to boost export. The more export means more foreign currency, which will further reduce current account deficit. The new transparent tax structure is likely to bring in more foreign direct investments as foreign companies are waiting for this new tax regime to roll out.

Introduction of goods and services tax is likely to help raise India’s medium term GDP growth, from 1.5 to 2 percent. However, the international experience belies this belief. There was a sharp decline in GDP growth rate in the countries where GST was implemented in the years from 1990 to 2000. In some countries, it turned negative.

Singapore is a big example where GST was adopted in 1994. At that time, GDP growth of Singapore was around 5.5 percent but it went as low as -3 percent. France was the first country to adopt GST. Australia, Canada, Japan, Malaysia, Singapore have so far successfully implemented GST. On a lighter note, there is a bad omen attached to the implementation of GST worldwide. It has been seen that the government which adopted this new tax regime never came back to power. This is because GST initially increased inflation and reduced GDP growth rate resulting in the suffering of the people. So they voted the government out of power. Now the big question — will Modi government lose power if GST did not bring relief to the common people of this country? However, given the popularity of Narendra Modi at the moment, anything is possible. India has smashed many stereotypes in the past.

Even demonetization did not have much adverse impact on the economy. International economists had predicted Indian economy to go down further after demonetization, but record production in food grains and higher IIP data tell a different story. There seems to be a political and economic will of the government to adopt GST from July 1. It has succeeded in bringing not only a consensus on the issue among the various political parties but has also created awareness among the people about this new indirect tax regime. Bringing the country to the path of digitization and cashless economy by the Modi government was just a prelude to the larger tax reform. As we have seen GST had a negative impact initially around the world, but in India people have immense faith in the capabilities of the Modi government. There is no doubt that GST, once it is adopted, will give impetus to the Indian economy, which is ushering into a new golden phase.

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