The GST Council has finally crossed the major tax rate hurdle. Soaked in a sense of optimism, it stuck to the conventional Laffer Curve principle of lower rates for higher revenue. Though touted as a unified indirect tax reform, in reality, GST has six rates including exempt, 0%, 5%, 12%, 18% and 28%. If you add Integrated GST and State GST, the tax slabs rise further. The historic economic reform promises massive benefits, but by only avoiding classification, design and administration issues.
The impact on key stakeholders varies. Households may not see a huge dip in expenses nor crumble under inflation. The proposal to exempt 50% of the CPI basket including rice and wheat, is laudable, but this may be negated by other price rises.
The industry will become competitive, and witness productivity gains, but it’s critical to watch out for commodities falling under the highest slab and see if they inherit legacy issues around classification anomalies. The first GST discussion paper floated in 2001 didn’t distinguish between goods and services, in line with global standards.
Yet, India is continuing with the distinction, despite concerns over services attracting higher taxes. Finally, in a federal setup where each state levies and collects state taxes, smooth execution is a challenge. Much like tax revenue doubling due to VAT rollout, GST will help accelerate the GDP by 1-2% and if framed effectively, may end up a winner.
So far, the decision-making pace has been encouraging, but the next steps need to translate even faster into action. These include passing the Central and Integrated GST Bills in Parliament, and State GST Bills in Assemblies. And the IT infrastructure with registered dealers should be ready to roll by April 2017. GST needs a workmanlike precision, as even a minor glitch can throw it into disarray. Despite incremental policy adjustments, the result may be difficult to appreciate and easy to criticise. For, when giant deals fail, life rarely goes back to normal