Goods and Services Tax (GST), a radical tax reform in India, would have wide-ranging significant impacts.
Studies have suggested that with GST replacing the current indirect tax regime, the country’s gross domestic product (GDP) would see an incremental positive impact of 1.5% to 2%. However, it would not be appropriate to expect the impact of this reform to be instantaneous.
The impact is going to be gradual, with initial years to see a certain level of cash flow issues, lack of clarity on implementation and issues on adaptation to the new regime.
Experience from the economies which have implemented GST in the past shows that such countries have faced inflation in initial years which gradually moderates down and reduces in the long run.
The debate of union levy versus state levy will come to an end with this reform. With GST being a one-tax, one-market concept, goods would easily move across the country without much of state boundaries obstacle and that will encourage industries to expand business on PAN India basis. This would also ultimately lead to a reduction in the logistics costs and therefore, reduction in the overall cost of production.
Given the essence of GST law being a seamless flow of tax credit and removal of tax cascading effect throughout the supply chain, it would lead to a reduction in prices, increase in demand and hence, would definitely promote intra-country trade. With the fall in the cost of production in India, the competitiveness of Indian goods in the international market will also increase and export sector would see a rising trend with a possible increase in exports by close to 10%.
While at the macro level the impacts are promising, GST would also have a level impact on micro-economics as there would be uniformity in law in terms of rates and statutory compliances. It would be a more efficient tax structure through IT enablement with little human intervention. Hence, it would reduce the cost of doing business in a medium to long term.
GST being a simpler tax structure, there would be less ambiguity in the law which will in effect lead to lesser disputes and litigations across the country (especially in the overlap of VAT and service tax on various industries).
GST should not be expected to be a single panacea for all the inefficiencies and flaws in the current regime. There are bound to be challenges and teething troubles which would be ironed out in the long run.
Under the ‘Make in India’ drive of the Union government, potential global investors are looking at expanding their involvement in India through their manufacturing facilities. GST law, posing a simpler tax regime with fewer complexities as compared to the current indirect tax regime, would complement the aspirations of the government on this initiative.
The key to GST meeting its objective lies in how the final law shapes out and how it is implemented and administered.