The government-appointed panel led by Chief Economic Advisor Arvind Subramanian surprised critics, recommending a lower-than-anticipated 17-18 per cent standard rate for the proposed Goods and Services Tax (GST). This is in line with the Congress party’s core demand for an 18 per cent cap on GST rate. Analysts predicted a 22-25 per cent slab, though such a rate could encounter consumer resistance and put pressure on exemptions. Federal countries like Canada, New Zealand, and Australia have successfully adopted GST in the past. With the notable exception of Scandinavian countries, which levied 25 per cent, few countries were successful in levying and sustaining such high rates. Given this backdrop, the panel did well by suggesting a reasonable rate, which could help widen the tax net. This is important as indirect taxes, comprising 37.19 per cent of our tax revenue, grew at a dismal 4 per cent in FY16.
Rationalising the tax system eases cost of doing business, could boost GDP growth — at least by 1-2 per cent — enhance exports and improve factors of production, land, labour, and capital. But it’s important to note that as GST replaces a number of state and central taxes, revenue gain may be insignificant in the near-term. Implementing GST could also lead us into uncharted waters, especially in relation to services taxation by states. Facilitating easy implementation and taxpayer compliance at an early stage via low rates and without adding to inflationary pressures will be critical.
From the government’s perspective, bringing alcohol, electricity, petroleum and real estate within the scope of the GST would further its objectives of improving governance, making Indian manufacturing competitive and reducing black money generation without compromising on states’ fiscal autonomy. But the onus is squarely on the Congress party, which has been blocking the passage of the GST Bill. The timing is crucial, as the market is witnessing an investor flight ahead of an anticipated US interest rate lift-off. The proposed GST reform could be a potential tool to attract and retain investors besides resurrecting India’s brand image.