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GST Bill moves ahead, could reduce effective tax rate

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The GST bill finally clears its biggest hurdle, the Rajya Sabha where the bill was passed unanimously in a historic moment which will ultimately change the tax structure in the country. However, the passage of the GST Constitutional Amendment is only the beginning of a tortuous and long drawn out process. It is expected to be implemented by the second half of 2018.

Consumers fear a rise in the cost of living as services which constitute a huge share in the consumption basket becomes dearer. The tax structure in India is going through a transformation and with the implementation of the GST, the specter of a multitude of taxes of every type will become history. In its place, a wide-ranging, destination-based indirect tax levy on the manufacture, sale, and consumption of goods and services will come into effect.

Instead of an archaic system plagued by an overabundance of unrestricted, ad-hoc taxes, a rule-based, transparent and stable tax regime will come into existence. It will ensure a much fairer tax structure which will be neutral and equal across players, products, services, destination and business cycles. It is hoped that the GST regime will fast track economic growth and garner better revenue for the government. The hassle free and well-organized payment of taxes on capital goods will lead to a fall in prices by 12% thereby increasing demand and spawn more investment.

The unified tax regime is a major step in the long-term outlook. However, it will result in some disturbance in the economy including a small rise in inflation as many goods and services which were not being taxed until now. It could also lead to a small loss in jobs as many positions under the old inspector raj will end. The new regime will start from only in 2017 and 2019 being a year of the election could trigger a slew of people friendly but economically harmful measures by the government.

One area of concern which experts have been pointing out is the fall in effective tax rate. However, this shortfall could be compensated by having a bigger tax base and a much slimmer exemption list. Initially, many high-taxed goods will enjoy an exemption from GST. The new tax structure will also reduce the opportunities for fraud and improve compliance.

States fear that they will lose a substantial volume of revenue with the new tax structure. This fear is unfounded because goods like petroleum which form a significant chunk of state funds have been exempted from the GST ambit. Though the transformation will initially spur some inflation but in the long run will reduce the wholesale price index (WPI), and its effect on consumer price index (CPI) would be limited.

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Aditi Ghosh
Aditi is a marketing consultant and full-time author at The GST Blog. Content marketing and social media promotion are one of her specialties. When she is not working, Aditi turns to her writing skill and offers promotional tips or information to the readers.

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