Thursday, May 7, 2015

GST: Growth hopes are overstated

After 15 years of initiating the discussions, Goods and Service Tax (GST) is finally seeing the light of the day. If rolled out from next financial year, it will subsume many of the taxes collected by state Govt.’s with a single tax to bring in uniformity across the states. It is a great reform in Tax Accounting. But will it prop up economy? Likely not, here is why.

Firstly, GST excludes few items such as liquor, petroleum, stamp duties on property etc. States will continue to have their say on these high tax revenue items. So liquor may continue to cost less in Goa and Petrol costlier in Karnataka than in Delhi and so on so forth despite the implementation of GST. Some of the non-uniformity is not going to disappear.

Looking at the benefits of GST, it is one tax to pay instead of multiple taxes currently levied at multiple stages of production or supply chain. Does it mean less tax to pay or one equivalent tax to be paid instead of small multiple taxes? If the taxes are going to be less, and if that benefit is passed on to consumer, it would surely help to boost consumption. But why Govt. will settle for lesser tax collection? How will they meet their fiscal deficit target, if their tax revenue takes a hit? Do you remember the last budget? Was there any tax relief offered to consumers? Why do you think State Govt.'s will settle down for lesser share in the taxes which Central Govt. will collect for them? When tax burden does not come down, why will the consumer demand go up or take up GDP growth rates higher?

So when the tax paid does not change, will the pricing of goods and services remain same? It depends on the current tax rates in the states and the replacement GST rate. Few low taxed items in certain states may see an uptick in their prices and those taxed in in higher rates than the GST rate which comes into effect will see their prices coming down. Overall, they regress to mean.

For corporate, this reform would mean ease of doing business. There will be less paperwork for tax accountants and it reduces compliance issues too. But unless the prices come down (due to lower taxes), expecting that GDP will see a boost is a false hope. The GST rate is still not yet decided but the panel is likely to drift towards neutral net tax. And what if Govt. wants to boost their earnings with a slightly higher rate than the net neutral rate? Taxes can go up or down depending on the policy and objectives of the Govt.

It might be clear now that this reform is definitely a welcome move but hoping that it will accelerate economic growth might just remain a hope.