The goods and services tax (GST) envisages concurrent power for the Centre and states to levy taxes on both goods and services and will subsume all indirect taxes levied at the Central and state level viz excise, VAT, entry tax, octroi and so on. The implementation of a unified GST in India is likely to be one of the most far-reaching indirect tax reforms, affecting all factors of production and economics agents.
To assess the medium-term impact of this tax reform, let us examine the inefficiencies in the current taxation system that are getting addressed through the GST. The current taxation system creates borders within borders in the country, and differing state taxation rates leads to distortions in the allocation of resources. A single common rate among states is likely to create the right incentives for business, to make their business investment decisions driven by market dynamics instead of taxation.\
Moreover, since GST is a multi-stage tax, it provides for an input tax credit mechanism, and since every link in the value chain, including dealers and distributors, will require evidence of compliance by its preceding link to claim the required set-offs, it is likely to broaden the tax base by increasing voluntary compliance. This also means that tax compliant organisations are likely to become more competitive in the market place, and is therefore good news for many listed companies in the Indian market.
However, as a consequence of the shift from unorganised to organised, there will be loss of jobs as the informal sector employment is in multiples of the organised sector.
Another tangible benefit for corporate India is likely to come from reduced logistics costs. Bigger warehouses and end market driven logistics planning is likely to result in meaningful costs savings over time. On account of entry taxes and heavy paper work at state check posts, there is an additional 5-7 hours added to the transit time for inter-state transport of goods. Abolishment of entry tax and easier tax compliance procedures is likely result in easier movement of goods across the country.
Whilst it is not clear whether GST will be indirect tax revenue accretive (as this will be a function of the GST structure that the GST council agrees to), it is likely to boost direct tax revenue collections from the time it will be implemented. GST implementation is likely to result in lifting direct tax collections as: (1) GST payments by tax-payers will be linked to their respective Permanent Account Number (PAN); and (2) the National Securities Depository Limited (NSDL), which maintains the Tax information System (TIN), will also look after the GST database.
This integration of the indirect tax system with the income tax system will enable authorities to triangulate information, thereby automatically leading to improved tax buoyancy.
In the near term, the GST will have an impact on companies/ sectors where players are subject to the highest applicable excise and VAT rates. Although the revenue neutral rate is yet to be decided, if we assume it will be in the 18-22 per cent range sectors like consumer and automobiles where the tax incidence is >24 per cent for most companies will stand to benefit. Lower prices of goods can help spur demand at the margin aiding growth in these sectors. There are a few consumer categories like milk (5-12 per cent), edible oil (5 per cent), branded apparel (5-7 per cent) which are being taxed at a significantly lower rate compared to the revenue neutral rate, and this can impact companies operating in these segments, contingent on the ability of companies to pass on this increase in taxes.
The Bill excludes alcohol from the purview but includes petroleum and petroleum products, which will be included at a date notified by the GST council.
Once the GST Council will decide modalities such as threshold, tax rates and exemptions under GST, the sector specific impacts will be known.
The structural nature of this tax reform is likely to create a better environment for doing business in India over time, which would create a platform for higher economic growth. It will bring down costs within the system, give better control to government on taxation, reduce unaccounted part of the economy, thus adding to government resources. This benefit could be then used to fund India’s development and increase its competitiveness within the global economy.
Implementation of the GST in the near-term could bring some upturn in inflation; however, the impact should be transitory. There are a number of administrative procedures required to be completed before the implementation becomes a reality. However, the overall impact of better allocation of resources, plus improving efficiency of domestic production and exports, is likely to be improved medium-term growth.