How GST Will Change the Face of Indian Economy?

Thanks to its Inordinate delay and excessive media coverage around it, GST has become a household acronym today. But let us understand what is the kind of impact it will have if it is enacted. Let’s start with a simple example on movement of goods in India. Very recently one of my close industrialist friend who has business interests in North East told me that a truck ferrying his goods from Mizoram to Indore takes around 18 days to cover 2700 Km approx. That is an average of 150 Km per day. Indian truck drivers clock an average of 280 km per day, much below the world average of 400 km per day and far below the 700 km the average truck driver in the US does every day. The underperformance of Indian truckers has less to do with bad roads and quality of trucks and more about prevailing laws.

Truck drivers in India spend 60 - 70 per cent of their time off roads negotiating check posts and toll plazas. There are 650-odd check posts in the country and 11 categories of taxes on the road transport sector. Since road traffic accounts for 60 per cent of freight traffic in India, the slow movement of trucks across states leads to productivity loss. According to research findings, if the distance covered goes up by 20 per cent per day, Indian truck productivity would improve by 12 per cent.

Higher productivity would cut the need for buffer stocks; reduce the loss of perishable goods, cut down the need for many warehouses, etc. Analysts say the implementation of the goods and services tax (GST) could provide the kind of productivity boost illustrated above. The benefits of GST are:

1) Unified market: The GST will cut down the large number of taxes imposed by the central government (eg. central VAT or excise duty, services tax, central sales tax on inter-state sales, etc.) and states (VAT on sales, entertainment tax, luxury tax and octroi and entry taxes levied by municipalities). This will lead to the creation of a unified market, which would facilitate seamless movement of goods across states and reduce the transaction cost of businesses.

2) Lower incentive to evade tax: Currently, companies have to pay taxes on entire underlying value of the product/service, but under GST, companies in a chain will have to pay tax only on the value-addition. So, the actual tax paid will likely be small and reduce the incentive for evasion. Also the system would monitor those who evade taxes. "For every product manufactured there is going to be a bill of material. Say for example, what are the inputs going in to manufacturing a chair? Leather how much, plastic how much, the leavers etc. So when this material is procured it would be mapped out what are the taxes paid on each of them. Once its manufactured entire chair is manufactured entire tax paid on the raw material would be credited back and only the final product would be taxed ..

3) Widen tax base: GST will give credits for all taxes paid earlier in the goods/services chain incentivising tax-paying firms to source inputs from other registered dealers. This will bring in additional revenues to the government as the unorganised sector, which is not part of the value chain, would be drawn into the tax net. Besides, states will be allowed to tax services (as opposed to only the central government) under the GST.

According to the National Council of Applied Economic Research, government's tax revenue will increase by about 0.2 per cent because of GST implementation, while GDP growth could go up by 0.9-1.7 per cent. Exports will also get a boost as they are zero-rated for taxes and also because the fall in cost of manufactured goods and services under GST will increase the competitiveness of Indian goods and services in the international market.

But in shorter run, implementation of GST will have its inflationary effect as the cost of all services and goods will increase by anywhere between 5 to 8% and this could be for a cycle of at-least 2 to 3 years.