India’s post-independence history has seen a few game-changing reforms like institutionalisation of centralised planning, the green and white revolutions, bank nationalisation, economic liberalisation, savings rate deregulation, FDI liberalisation and the golden quadrilateral project. These have exalted India’s economic status.
The latest move by the government to pass the Goods and Services Tax (GST) bill is a jewel in the crown of economic reforms. The GST will unify and strengthen India’s tax architecture and bring it in sync with some of the best tax systems in the world. It will make manufacturing efficient and boost the ease of doing business. In doing so, the GST will usher a virtuous growth cycle in India for several decades.
A landmark change like the GST involves assiduous consensus-building in a federal political-economic structure. Countries that have implemented the GST have gone through a similar experience. The Narendra Modi government has, in fact, in a short span of a little over two years displayed deft floor management and outreach skills. It has brought together various stakeholders who now agree on the contours of the GST. The implementation of the 14th finance commission’s recommendations and gradual harmonisation of tax rates in the manufacturing and service sectors clearly gave a fillip to the consensus-building process for the GST. Policymakers will now work towards building the facilitating architecture in order to roll out GST from April 2017.
Implementation of GST is expected to create a shift from a complex, multi-layered and cascading indirect tax system to a single unified indirect tax system that permits tax set off across the value chain, both for goods and services. This will lower the cost of production, making Indian goods competitive, vis-a-vis imports and enhance their profitability. Efficiency will drive economies of scale, leading to harnessing of inflation.
Inter-state barriers to the trade of goods in the form of location-based tax requirements have led to deadweight losses with respect to transportation transit time. This has created inefficiencies in the supply chain. GST is expected to reduce the compliance scrutiny thereby leading to seamless movement of goods between states.
Restructuring of inter-state transactions is expected to create a level playing field with the creation of a common national market. In this context, the government’s decision to scrap the one per cent inter-state levy was correct as it would have undermined the true benefit of GST by increasing compliance costs. Statistics suggest that, on an average, truckers lose about six hours daily in tax compliance-related matters at various entry points, adding to inefficiencies in logistics and transportation.
Presently, all decisions with respect to supply and distribution are guided by the need to minimise the impact of indirect taxes. With the advent of GST, the supply chain decisions are likely to be a function of economic factors such as costs and proximity to markets rather than non-economic factors such as the VAT rate differentials between states. This shall lead to efficient reallocation of resources in the economy.
The government’s push at making India the global hub for manufacturing is likely to be founded on the ecosystem that GST will create. A favourable environment for supply chains, seamless movement of goods between states and improved efficiency will foster higher growth in the manufacturing sector. This will, in turn, facilitate the fruition of the “Make in India” dream.
At a macro-level, the benefits of GST should start unfolding over two-three years. The most significant impact would be the structural enhancement of India’s potential GDP growth by 1.0 per cent-1.5 per cent – a disinflationary impact led by a revival of the investment cycle and improvement in the government’s tax buoyancy.
The formation of the monetary policy committee (expected to be in place by September 2016), the clearing of the insolvency and bankruptcy code and the GST will fortify India’s economic system. It will prepare the economy for the next take-off.