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A Win-win For All Over The Long Term

A unified market across India created by GST presents a golden opportunity to re-engineer and rationalise transportation and logistics networks

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The goods and Services Tax (GST) is seen as a game changer reform in the indirect tax regime in India with resultant benefits such as a common national market for goods and services, seamless end-to-end credit chain and the removal of cascading effect of input taxes. As per a NCAER study, the elimination of the cascading of taxes on exports alone will mean an increase in GDP by 0.9-1.7 per cent!

But I note that GST is an indirect tax and attaches to the underlying goods or service to be passed on to the ultimate consumer as part of the price he pays for the goods or service. If the rate of GST levied is higher than the aggregate of taxes suffered by such goods/service in the pre-GST regime, there will be extra burden on the common man, who is actually the ultimate consumer in most cases.

So the question arises as to what the GST rate structure is likely to be. The Revenue Neutral Rate (RNR), that is, the single rate of GST which would preserve the current revenues (both Centre and states) generated from the existing levies which are to be subsumed in the GST, have been estimated differently by different expert groups using different models. The Thirteenth Finance Commission had estimated RNR at 12 per cent, NIPFP at 18.86 per cent (as presented to Empowered Committee of GST) and the Arvind Subramanian Committee at 15-15.5 per cent.

Let me point out here that RNR is different from the standard rate which is the default rate applied to most goods and services in a multi-rate structure and would generally be higher than the RNR. For example, the Arvind Subramanian Committee has recommended a standard rate between 16.9 per cent and 18.9 per cent depending on the RNR and the rate on precious metals.

Though the empowered committee has recently allowed placing the Model GST Law drafted by it in the public domain for comments, it has not revealed its mind about the likely GST rate structure. So it is still not clear whether there will be single rate or there will a rate differential between goods and services or not. So there could be two possibilities.

First is that there will be a single rate. This means an averaging across existing tax rates. In the current indirect tax regime, the overall tax burden on goods which are taxed both by the Centre and states is estimated to be in the range of 25-30 per cent. Services are taxed only by the Centre and inclusive of Swachh Bharat and Krishi Kalyan cesses, attract a lower rate of 15 per cent. So a single rate means that the overall tax burden on goods will go down whereas the taxes on services will go up.

The second possibility is that services attract a lower GST rate than goods. Here, depending on actual rates, the effective tax burden may be preserved. But the risk is of increased classification disputes regarding whether a supply will be supply of goods or of service.

So depending on the nature of goods or services consumed, the common man may get impacted or benefited depending on the GST rate prescribed. Accordingly, there will be no one uniform answer to the question of whether and how the common man will be impacted by GST. It will all depend on his basket of consumption and may vary from individual to individual.

Obviously, there will be a tendency on the part of the suppliers to pass on the additional costs in case of higher tax incidence and to grab the benefit where there is reduction in tax. But it is here that the market competition and close monitoring by government agencies will play a major role in determining how much of the additional cost and/or benefit gets passed on and how much of it gets absorbed.

But I can safely caution here that, in the short term, the common man should be prepared for a one-time cost impact arising from the switch- over to GST.

However, in my view, the real gains to the economy and the common man will arise in the medium to long term from the following efficiencies of a well-designed GST system:

1. GST will eliminate supply chain inefficiencies: Currently there is an incentive for geographic fragmentation of production as goods produced in the state of consumption generally attract lower net tax. The Central Sales Tax (CST) levied on inter-state sales is not eligible to be taken as input tax credit. Though CST can be avoided partially through branch/stock transfers, the savings get substantially offset by the incremental logistics and warehousing costs.
2. GST will reduce logistics costs: A unified market across India created by GST presents a golden opportunity to re-engineer and rationalise transportation and logistics networks. As per an estimate, one-third of travel time is wasted by trucks on official stoppages en route and at check posts. Given that over 65 per cent of India’s freight moves by road even a small reduction in such time wastage will mean a substantial savings in logistics costs!
3. GST will broaden tax base by improving compliance: The Model GST Law prescribes a self-auditing/policing mechanism in the form of the requirement for matching between supplier and receiver for allowing input tax credit. Moreover, a dual tax administration will mean a greater likelihood of any tax evasion being detected. A higher tax base means that a lower GST rate may be sufficient for raising the same level of revenues.
4. GST will minimise cascading: subsumption of multiple levies with seamless end-to-end credit chain will mean that the cascading effect will be minimised.
5. GST will reduce economic distortions: A common national market will enable production decisions based on comparative advantage rather than on the basis of tax benefits.

So in the medium to long term, the efficiencies arising from implementation of GST throw up possibilities of lower tax rates and higher economic growth, and thereby a win-win for both the government and the common man.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

V. Lakshmikumaran

The author is Managing Partner, Lakshmikumaran & Sridharan

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