Uniform GST: Can It Revive India’s Economic Growth?

Inflation is rising and for April, the figure stands at 8.9% while projected economic growth indicated a fall from 5.7% to 5.5%. Rising oil bills have not helped either in curbing inflation.

However, the World Bank has recommended a uniform Goods and Services Tax (GST), along with less complicated taxation systems, a judicial use of subsidies and a subsequent broadening of the tax base to ensure more success in boosting India’s economic growth and curbing inflation.

The process of introducing a uniform system of central and state taxes has long been on the anvil but it has not taken off. As of now, the Empowered Committee of State Finance Ministers and the GST Network (GSTN) are working on it, with the GSTN providing the required IT infrastructure to implement the new system. The aim is to ensure the right policy framework in combination with a solid information infrastructure to minimise the costs of compliance, monitoring and effective control of the new GST system. The previous government did not push it through, but the new government has made it one of its poll promises.

Political will
The newly elected Narendra Modi government has already emphasised its keen interest to implement the GST and Finance Minister Arun Jaitley, at the pre-budget meeting with the ministers of the states and union territories, has emphasised the importance of the GST and requested their co-operation.

“The slowdown in economic growth, coupled with high inflationary pressure, poses a challenge to the macroeconomic environment,” said Jaitley. “Tax collections are only at 10% of the GDP, compared to the initial budget estimates of 10.9%. India can ill afford this trend and I believe that the deliberation held today will be the first of the series of such deliberations and together we will steer the economy in the mutually agreed direction.”

He has also indicated the government’s will to work in close co-operation with the states and union territories.

Centre, states and the GST
States need not fear that they will lose control of revenues after the implementation of the GST as the dual (Central and States) tax structure is going to be retained. A comprehensive list of taxable and exempted items and rates will be drawn up, thereby decreasing the exempted ceilings. The GST is expected to increase the tax base by increasing the number of taxable goods and services. Expected total GST rate is around 14-16% and after the total GST rate has been agreed upon, the CGST (Central GST) and the SGST (States GST) will be decided. The modalities of sharing of tax revenues with the states and the reimbursement of any shortfall in their tax kitty have to be worked out and a consensus will have to be reached.

Legislation
Of course, it is not an easy or simple exercise. Multiple legislations, at both central and state levels, have to be passed and the required infrastructure has to be put in place. It may take some time, perhaps a couple of years, but the government has already shown that the GST is a priority.

The overwhelming majority that the Narendra Modi government has in the Parliament, coupled with the cordial relations the present central government shares with a majority of the states, should ensure that the necessary legislation will be passed without too many hassles.

Present taxation versus the benefits of GST
At present, a consumer in India is taxed more than once. First, he/she has to pay the CST or Central Sale Tax and next comes the state’s sales tax, thus leading to a double burden. Besides the CST, 36 states and union territories of India levy a sales tax on sale and purchase of goods. But the sales tax levied is not uniform in nature and varies from state to state. Most states also levy tax on entry of goods. The list of taxable goods, classifications and rates are neither uniform, nor standardised.

Compliance to all these complicated taxes is burdensome, time-wasting and leads to corruption. Most businesses face commercial and legal hassles in this regard. The end result is that goods cost more and customers naturally seek cheaper alternatives. India already faces competition from other growing economies, such as China. And we are effectively pricing ourselves out.

The GST is an all-inclusive tax at a national level on the manufacturing, sale and consumption of goods. It is expected to lead to a more willing and increased compliance, thus increasing the tax collected at a lower cost of collection. Of greater importance is the end result – lower costs of goods and services. This will benefit the consumer, leading to more consumption and growth of the economy.

Industry and business response
The business sector has already indicated that it will more than welcome the GST. It wants a transparent, unambiguous and easy-to-comply-with tax law that will ease the pressure on industry and help growth. A growth of 1-2 percentage points is anticipated when the GST is implemented and this will greatly benefit the economy.

Prime Minister Narendra Modi has already announced his intent to push for economic reforms, however unpopular, and with his pragmatic track record, we can expect the GST to be implemented at the earliest.