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GST rollout could be a template for future of cooperative federalism
Updated:Jul 2, 2017
 
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By Rana Kapoor 
 
The Goods and Services Tax (GST), which came into effect from July 1, is the most significant economic reform since liberalisation commenced in 1991, and envisages ‘a one Economic India’ which will lead to a more efficient and productive economy. It will also add 2.5-3% to GDP over the medium term.
 
The GST implementation will lead to several macroeconomic gains. The transition to the new framework may result in some short term pain, but the commensurate gains are going to be disproportionately higher, and it’s a matter of time before even small and medium enterprises start imbibing these advantages.
 
Riding on this key reform, GDP growth in FY18 is expected to rise to 7.4% (vs 7.1% in FY17), led by consumption, public sector-led capex and export growth. Further, as average inflation is likely to move towards 4% levels this fiscal, the RBI might opt for a 25 bps rate cut in the policy review in August.
 
The GST is expected to reduce manufacturing costs by 10-15% as logistics costs will decline. It will also boost productivity through efficient resource allocation and greater tax compliance. Moreover, the GST will lead to enhanced transparency and higher foreign direct investment (FDI).
 
Mapping the GST rates to the consumer price index (CPI) basket indicates disinflation of 25-50 bps, which is likely to transmit over the medium term, even though in the short term, the disinflationary impact is unlikely to play out on account of higher compliance costs.
 
The GST roll out could be a template for the future of cooperative federalism. The GST council can now serve as a template for reforming other such institutions of cooperative federalism, starting with the inter-state council.
 
Tax integration under the GST will result in supply chain restructuring to induce changes in India’s trade flows and provide a massive fillip to state’s tax collections as services will be brought under their taxation ambit. By the very construct of the GST, states will see a 1.8x increase in their service tax collections.
 
Our in-house simulation of how tax collections would adjust between the Centre and states post GST; basis a redistribution of tax powers and revenues indicate an increase in annual tax revenues of close to Rs 30,000 crore for states as an aggregate.
 
Further, as the GST shifts levy of sales tax from point of origin to point of consumption we will see negative implications for manufacturing states while positively affecting the consumption states. Similarly, with states now levying services tax under the GST, states with high share of services in state gross domestic product (SGDP) will stand to benefit.
 
Currently, it takes an average of 241 hours per year to pay taxes in India – compared to 110 in Britain and 175 in the United States. The most telling impact of the GST will be in terms of improving the ease of doing business – especially in terms of making ‘paying taxes’ easier.
 
Riding on the achievements, progressive reforms and strategic initiatives of the last three years the economy is well and truly in ‘take off’ mode and the GST implementation will fuel this growth trajectory.
 
 
 
 
 
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