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GST: Short-Term Pain Will Be Outweighed By Multiple Gains

GST rollout could be a blueprint for the future of cooperative federalism.

13/07/2017 8:44 AM IST | Updated 13/07/2017 1:46 PM IST
Adnan Abidi / Reuters

As India begins implementing the biggest ever overhaul of its indirect tax architecture, through the Goods and Services Tax (GST), I expect significant benefits to accrue in the medium term through the creation of a unified market, removal of tax on tax cascading effect and expansion of the formal economy as more companies enter the indirect tax net. GST will lead to a more efficient and productive economy, and add 2.5-3% to India's GDP over the medium term.

GST implementation will lead to several macroeconomic gains, even though the transition to the new framework may result in some short-term pain. The commensurate gains are going to be disproportionately higher, though, and I truly believe that it's a matter of time before small and medium enterprises too start imbibing these advantages.

Big gains to come

GST is expected to accrue significant gains in medium term through formation of unified market, removal of tax-on-tax cascading and higher compliance. I expect GDP growth in FY18 to rise to 7.4% (vs. 7.1% in FY17), led by consumption, public sector-led capex and export growth.

The GST council can now serve as a template for reforming other such institutions of cooperative federalism, starting with the inter-state council.

Further, on the back of recent softer-than-expected food price momentum, food inflation is likely to move towards 4% levels in this fiscal, and this could prompt the RBI to opt for a 25 bps rate cut in the upcoming policy review in August.

Overall, GST is expected to reduce manufacturing costs by 10-15% as logistics costs will decline. It will also boost productivity through efficient resource allocation and greater tax compliance. I also believe that GST will lead to enhanced transparency and higher foreign direct investment.

Going beyond the pure economic impact, I truly believe that the GST roll out could be a blueprint for the future of cooperative federalism. The GST council can now serve as a template for reforming other such institutions of cooperative federalism, starting with the inter-state council.

Tax integration under GST will result in supply chain restructuring to induce changes in India's trade flows and provide a massive fillip to state's tax collections as services will be brought under their taxation ambit. By the very construct of GST, states will see a 1.8x increase in their service tax collections.

Our in-house simulation of how tax collections would adjust between the Centre and states post GST, basis a redistribution of tax powers and revenues, indicates an increase in annual tax revenues of close to ₹30,000 crore for states as an aggregate.

I believe the most telling impact of GST will be in terms of improving ease of doing business –especially in terms of making "paying taxes" easier.

Further, as GST shifts levy of sales tax from point of origin to point of consumption we will see negative implications for manufacturing states while positively affecting the consumption states. Similarly, with states now levying services tax under GST, states with high share of services in SGDP will stand to benefit.

Interestingly, states with high share of manufacturing such as Uttarakhand, Goa, Gujarat, Himachal Pradesh and Chhattisgarh also have a strong presence of the services sector, and so the impact will be less pronounced in these cases. States with high share of Consumption which stand to gain (also a factor of the state's population) include Uttar Pradesh, Maharashtra, Bihar and West Bengal.

Conclusion

Our proprietary indicator—the YBL Growth Index—is showing a pick-up in growth conditions from March onwards. The indicator is now near its long-term average, indicating normalisation of growth conditions. Currently, it takes an average of 241 hours per year to pay taxes in India, compared to 110 in UK and 175 in the US. I believe the most telling impact of GST will be in terms of improving ease of doing business –especially in terms of making "paying taxes" easier.

Riding on the achievements, progressive reforms and strategic initiatives of the last three years the Indian economy is well and truly in "take off" mode and GST implementation will fuel this growth trajectory.

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