The Impact of Goods & Service Tax on Indian Economy

- Siddharth Shah

The passage of the constitutional amendment that brings a system of Goods & Service Tax (GST) is a
significant achievement for the Indian economy. The GST bill is a compelling reform as it aims to
simplify and unify the indirect tax framework in India, which is presently beset with bureaucratic
complexity, because of numerous and multifold state and central taxes, a myriad of exemptions and
interdependent taxes.

This bill is set to increase the GDP growth rate in the medium term as it is expected to be a positive.
The positivity is due to expectation of increased productivity and efficiency in the economy. GST
implementation may boost the improvement of the manufacturing & price competitiveness of
domestic producers. It seeks to curtail seepage of government revenues from the system which will
eventually aid increased government taxes and betterment of the fiscal deficit.

However, the short run outlook seems like it may have a mixed impact. One of the key reasons is the
perceived higher inflation. This GST-induced inflation may well lead to higher taxes on discretionary
items which will eventually lower consumption expenditure. This can hurt the GDP growth rate more
than the revenues the government aims to bring in.

Advantages to the Government (Centre & States)

Streamlined administration.
Reduced seepages leading to higher overall revenues.

Advantages to the Business Sector

Ease of doing business due to uniform taxes and collection body.

Eradication of the dependent taxation that will reduce expenses of businesses.
Benefits to manufacturers due to price competitiveness.
Single PAN based application for new dealers.

Advantages to Consumers

Clear understanding of taxes and duties paid to the government.

Higher efficiency and reduced seepage can lower costs after sometime.
GST - The Road Ahead

1. The GST bill will be sent for the Presidential reference.

2. Subsequently it will be sent to the Lok Sabha which needs to approve the amendments with
two-thirds majority (a certain possibility).
3. The President will then refer it to State Assemblies.
4. At least 15 states would need to ratify the bill with two-thirds majority (States have valid
reasons not to approve because of revenue loss).
5. It will be sent to the President for assent.
6. It will be notified in the gazette.
7. Then, the Parliament would take up the actual GST Bill (Please note the current Bill tabled in
the Rajya Sabha was the Constitutional Amendment to bring the GST bill).
8. Opposition would demand their terms and assurances, if any, from the Government.
9. The subsequent GST Bill would not be categorized a Money Bill, and does not require passage
through the Rajya Sabha, thereby saving much needed time and effort.
10. The entire process may take several months and possibly the entirety of the upcoming Winter
Session.

Summary

The GST Bill is undoubtedly the biggest tax reform tabled by the Government in the post-liberalization
age. The positive impact of GST on GDP growth due higher productivity, efficiency and ease of doing
business will be seen over a period of time. But in the short and medium term, a disproportionate GST
rate implemented to keep the States happy rate may hurt consumption, earnings, GDP growth rate,
investor sentiment and the ruling party itself.

About the author

Siddharth Shah is pursuing his MBA (Mumbai University) and CFA Level II (CFA Institute). He has successfully
cleared both levels of the FRM examination. He has a BBA in Finance from NMIMS. He has worked as a Freelance
Consultant for Investment and Risk Advisory. He likes to debate on current affairs and their implications on the
financial markets.

For publications, reprints and permissions, please contact him on sidd.shah@live.in.