ECONOMIC IMPACT OF GST

GST (Goods and Services Tax) will lead to the creation of a unified market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses. Under GST, manufacturers will get credits for all taxes paid earlier in the goods/services chain, thus incentivising firms to source inputs from other registered dealers. This could bring in additional revenues to the government as the unorganized sector, which is not part of the value chain, would be drawn into the tax net.

To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in the value-added/tax chain. Thus, the new tax regime is seen as less intrusive, more self-policing, and hence more effective way of reducing corruption and improving tax compliance. GST would be levied in 3 different forms.

Forms of GST

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The third form would be Integrated GST (IGST) which would be levied by the center, consisting of CGST plus SGST on all inter-state transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services.

Issues:

  1. Taxation of inter-state services and their method of taxation
  2. Difficulties in defining Place of supply, place of delivery
  3. Integration of certain Central and State taxes (Various Cess, Electricity duty etc.)
  4. Disputes even with regard to classification of goods
  5. Jurisdictional Issues with regard to registration and Assessments

Impact on Economy:

In the first place, the macroeconomic impact of a change to the introduction of the GST is significant in terms of growth effects, price effects, current account effects and the effect on the budget balance.

Secondly, in a highly developed open economy with a high and growing service sector, a change in the tax mix from income to consumption-based taxes is likely to provide a fruitful source of revenue.

Implementation of GST could facilitate a much needed correction in fiscal deficit. In the base case, it is believed that partial GST – one that excludes petroleum goods is most likely. Even with this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017. On the downside, a complete failure to implement GST would result in the fiscal deficit being higher at around 4-4.2% in fiscal 2016-2017. A National Council of Applied Economic Research study suggested that GST could boost India’s GPP growth by 0.9-1.7 per cent.

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Strategists warn it could disrupt consumption and growth, at least in the short-term. However, determining the exact economic impact hinges on the GST tax rate. According to a report by HSBC, in terms of growth impact on [GST] implementation, the near-term could be messy, with adjustment costs for the private sector grappling with inter-sector implications, and the central government trying to compensate states for revenue loss. Over the medium-term however, the outlook is positive.

Implementation of the GST in the near-term could bring some upturn in inflation; however, the impact should be transitory, according to a Morgan Stanley report.

HSBC believes the GST will lead to higher foreign direct investment inflows and a narrow current account deficit-factors that should help the INR eventually outperform other Asian and emerging market currencies.

 

Sources:

http://profit.ndtv.com/news/economy/article-how-gst-will-impact-economy-your-10-point-cheat-sheet-1439383 http://taxguru.in/goods-and-service-tax/gst-impact-indian-economy.html http://www.cnbc.com/2016/08/04/indias-goods-and-services-tax-may-disrupt-economy-in-the-short-term.html

Image:http://economictimes.indiatimes.com/news/economy/policy/the-advantages-of-gst-take-a-look-atbenefits/articleshow/53514291.cms

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