Entering the age of GST

Entering the age of GST

Context:

• GST is expected to meet country’s economic growth for a long run but along with it there’s a challenge to untangle the initial shortcomings.

Pros and Cons

• The objective of including real estate within a reasonable time period is appreciated because besides expanding the tax base, this will help in fighting black money.
• GST will unify multiple taxes into a single tax and reduce compliance and administrative cost in the long term, do away with levies like octroi and ensure a more unified market.
• GST will also reduce cascading on account of levies like octroi, purchase tax and central sales tax and make the economy more export-competitive.
• The country might see a significant increase in revenue productivity of income tax as the seeding of PAN in GST registration will make it difficult for businessmen to evade the tax.
• But it is to be noted that, petroleum products are excluded and cascading on that account will continue — they contribute over 35-40% of revenue from indirect taxes.
• Also, being an amalgamation of rates it robs benefits from lower administrative, compliance and distortion costs.
• The GST puts additional burden on administration, increases the compliance cost and the load-bearing capacity of technology needed for providing input tax credit with multiple rates by matching every invoice.
• The requirement of e-way bills for inter-State movements has also been a cause of concern.

The short term atrocity in economy:

• Because of GST, the short-term disruption in the economy depends  how well the transition is planned and how fast the economic agents will adjust to the new normal.
• For example, the disruptions caused by demonetisation continues to haunt large parts of the unorganised economy even though economy had been substantially remonetised.
• Transporters will soon find that the tax paid on fuel cannot be credited against the GST payable on the transportation services rendered by them.
• There are questions about the rates of tax, mandated compliances and errors in transition.
• Moreover, investment activity is virtually at a standstill, with everyone waiting to see how the reform pans.

Conclusion:

• In a nutshell, any major tax reform could lead to disruption, and the complexity of the structure and the untested technology platform adds to the fear.
• It is very difficult to predict the impact of short time disruptions and the discontent they create.
• The government could have used the time until September to provide greater clarity and test the technology through some dry runs to ensure a smoother transition.
• The much wanted growth acceleration will take place only in the long term when the transaction cost of businesses comes down.