GST: Lubricating India’s economic gears

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Published: August 6, 2016 6:16:10 AM

A centralised and standardised GST registration would help in creation of an ecosystem conducive to start-upsa

Just a couple of weeks ago, we marked 25 years of liberalisation. In 1991, a liberalised investment and trade regime kick-started the economy bringing about a landmark change in our economy and strongly positioning India as an economic superpower.

The passage of the Constitutional Amendment Bill on Goods & Services Tax (GST) is a similar landmark step, which will lubricate the gears of the Indian economy and ensure a virtuous growth cycle for Indian industries for the next several decades. This bold step towards unifying our tax architecture to bring it in line with the world’s leading economies is also a critical step towards the government’s vision of improving the “ease of doing business” in India. The passage of GST was achieved through consensus building among the states and is a shining example of “co-operative federalism” which is necessary for the success of the Indian economy.

The policymakers will now work towards building the required architecture to facilitate roll-out of GST from April 2017.

Once GST gets implemented, there will be a radical transformation from a complex, multi layered and cascading indirect tax system to a single and unified direct tax system that allows for tax set-off across the value chain, both for goods and services. This should help lower product costs and thereby make Indian goods competitive in comparison to imports, increasing profitability of companies. This efficiency and improvement should help achieve larger economies of scale leading to harnessing of inflation.

GST will also reduce the compliance scrutiny for inter-state movement of goods, which is currently a major source of concern and results in deadweight losses owing to transportation time. Removal of these barriers should help the supply chain of manufacturing industries to become much more efficient.

Restructuring of inter-state transactions is expected to create a level-playing field with creation of common national market. In this context, I applaud the government’s decision to scrap 1% inter-state levy as it would have undermined the true benefit of GST by increasing the compliance costs. Statistics suggest, truckers in India currently on an average lose about six hours daily in tax compliance related matters at various entry points, adding to inefficiencies in logistics and transportation.

Presently, all decisions with respect to supply and distribution are guided by the need to minimise the impact of indirect taxes. With the advent of GST the supply chain decisions are likely to be a function of economic factors such as costs, proximity to market rather than non-economic factors such as VAT rate differential between states. This shall lead to efficient reallocation of resources in the economy.

Improving ease of doing business

A centralised and standardised GST registration would help in creation of an ecosystem conducive to start-ups, which can adhere to a centralised tax system. A unified system will also help reduce the compliance burden while allowing start-ups to compete on a level footing with established players. Also uniformity of tax systems across states can help all levels of production resulting in an improvement in the ease of doing business. The improvement in this ranking, which has been a key focus of the government, will also help attract more foreign direct investment and position India as a favourable and preferred investment destination.

Over the next 2-3 years, GST will have a cascading effect on the Indian economy and with structural enhancement, this can translate to a potential growth in GDP of 1-1.5%. GST should also help in the revival of an investment cycle which could bring in a disinflationary impact.

I strongly believe that passage of this bill will help fortify India’s economic system and has set a strong platform for India to grow in the next decade and cement its position as a global economic superpower.

The Indian economy’s wheels have been set in motion, and reforms such as the GST and the institutionalisation of the insolvency & bankruptcy code will act as lubricants to take this growth into the next gear!

The author is MD & CEO, YES Bank and chairman, YES Institute. Views are personal

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