With the start of monsoon parliament session all focus again shifted to Goods and Services Tax Bill (GST). The bill was already been passed in the Lok Sabha in May last year, however its faced various hurdles from opposition parties in the Upper House since then. Now with the reports of some middle path emerging between the ruling Bhartiya Janta Party (BJP) and main opposition party Congress, hopes are high that the GST bill will get through the Rajya Sabha during this parliament session.
In the present tax structure there are multiple indirect taxes levied by the central and state governments eg. excise tax, service tax, VAT, luxury tax, entertainment tax, etc. States also levy interstate taxes on goods moving in and out of the states.
GST, once implemented, will replace the multi tax and multi rate indirect tax system and only one uniform Goods and Services Tax will be levied on all the goods and services across country.
Effect on markets
GST is considered as the biggest indirect tax reform of the decade; its implementation will definitely boost the investor sentiments and reflect positively on governments reforms agenda. Any positive news around GST would be positive for markets in short term. However, actual benefit of GST would take time to reflect in the earning of companies.
If properly implemented, GST would boost earnings of logistics, transportation and manufacturing companies and attract increased investment in these sectors over the period.
Effect on economy
Over the long term, GST would increase the productivity in economy by filling the loopholes in the present tax structure and reducing inefficiencies in interstate trades and geographical location of businesses within India.
The GST would increase the efficiency by compressing the supply chain through optimal warehouse locations and easy transportation of goods. It will reduce the logistics cost and tax rates likely to be lower in major products category under GST. This would result in lower cost of doing business in country and attract more investments.
It would bring the large number of businesses into the tax system, earlier which were exempted or evading taxes by using the loopholes in the tax structure. This will result in lowering the overall tax burden and also widen the tax base for government.
With single tax rate and short list of exemption, it would simplify the indirect tax regime resulting in easy tax compliance and lower cost.
GST would result in increased productivity, lower cost and improved fiscal position in long run; it also has some negative effects in short term.
Currently services are taxed at lower rate than goods. GST implementation would likely to lower the services growth. Increased tax on services would also push the CPI inflation higher in short term.
However, GST is one of the reforms but it is not expected to be a game changer as the effect of growth will dissipate after 2-3 years as the economy adjust to the new tax rates and after improved tax collection. State still can levy indirect taxes on alcohol and fuels. They form a major chunk of tax collections. The effect on small business could be significant and these small scale industries constitute 40 per cent of the value of items exports. They will now have a higher incidence of taxes compared to the organised sector which pays taxes at higher rates. It would also shift the consumption habits of luxuries items which are consumed.
(The author is head-fixed income at Quantum AMC)