Will the GST (Goods and Services Tax) be the Game-Changer for the Indian Economy?

All Hail the Game-Changing GST

On July 1, 2017, the Indian Government brought forward the GST (Goods and Services Tax) for implementation on a nationwide basis. This tax, which had to be passed through parliament with a constitutional amendment has been much celebrated and hyped for its game changing attributes.

This can be seen in the government went to the extent of likening it to a second independence which can be seen in the way the tax was rolled out in the Central Hall of Parliament at the stroke of midnight.

While the “optics” and the “symbolism” might very well be intended to score political points, there is no gainsaying the fact that the GST, if implemented and monitored in addition to being accepted by the nation, does indeed have the potential to be a game changer for the Indian Economy.

Indeed, many economists have predicted that it would lead to a 2% increase in GDP (Gross Domestic Product) in addition to widening the tax net thereby bringing in Millions of Small Traders and Businesspersons who were hitherto out of the taxpayer bracket and in the process, increasing the tax revenues.

What is the GST and what it seeks to remedy?

So, what exactly is the GST and why has it been hailed by many including the principal opposition who were earlier the party in power and had first mooted the tax reform?

To understand what GST is, we must first analyze the situation that was prevalent until now and for this, let us delve into some real world impacts. If you have ever traveled by a National Highway or even a State Highway, you might have noticed a long queue of trucks and other heavy vehicles carrying goods at the state borders waiting for the government officials to scrutinize the paperwork that they have and to let them into the state.

This is because earlier, each state had taxes on goods and services that varied from region to region and from state to state and hence, at the state borders, the taxes had to be adjusted accordingly for such goods which were being transported interstate.

Needless to say, this process while time-consuming and encouraging corruption also had the effect of deterring improvements in logistics and transport as businesses would not have to factor in delays on account of the waiting at the state borders into their costs of business.

Indeed, if you ask any businessperson who has ever sold goods in multiple states, they would recount horror stories about how their goods had to wait for a day or more (in some cases, two full days) for the rationalization of the taxes between states.

Also, with differential taxation, manufacturers had to incur substantial costs for the reasons above and this meant that they were more likely to disperse their operations instead of manufacturing their products in cost effective locations.

Lastly, it is a known fact that corruption was rampant due to this differential taxation which led to heartburn for the businesses.

How Does the GST Help?

The GST, by ensuring a uniform and nationwide tax rate for each category of products (we will return to this aspect later) and goods and services have done away with the need for differential taxation between states as well removed the need for delays and other costs of business (off the books). In addition, it ensures that goods and services are taxed at each step of the value chain, and the final price would reflect most of these savings thereby benefiting the end user or the consumer.

Further, the GST by ensuring that small businesses and all businesses for that matter enter the taxpayer base would increase the number of taxpayers exponentially thereby increasing the tax revenues for the governments.

Moreover, the GST would enable goods to be manufactured anywhere meaning that businesses can move their plants to cost-effective locations and transport the products nationwide thereby benefiting them (again, we will revisit this point).

Lastly, the GST would also eliminate corruption and boost the businesses since they can save on this expense.

Some Concerns

Having said that, there are some shortcomings of the GST. As mentioned in the previous section, first, the fact that there is no ONE tax rate or tax slab for all goods and services, and instead, there are various rates for each category has been cited as a shortcoming with some critics even saying that it would make a “mockery” of the whole process since one set of complexities have been replaced by another set of complexities.

In addition, with a uniform tax for each product nationwide, the states that consume more would benefit than the states that produce more as the former would benefit from lower prices without sharing the burden of the costs incurred.

To explain, suppose a particular state produces little but consumes more, the consumers in that state benefit from a single tax without having to bear the costs of contributing to the manufacture of that good or service.

Third, while the Act provides for the states losing out thus to be compensated, it is not yet clear as to how this would work out say, a few months or years down the line.

Wait for the Impact

Indeed, the last point is the most important as these are early days for the GST and much would depend on how well it is implemented and monitored as well as regulated.

In addition, much would also depend on the willingness of the traders and businesspersons in contributing to the success of the act.

To conclude, GST can indeed be the game changer for the Indian Economy if it is implemented and accepted rationally and thoughtfully.

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