Sticking to GST rollout deadline of April 2017 is challenging, says Raghuram Rajan

After all the melee for passing the GST in the Parliament, it is time to get on with the onerous task of enforcing the regime which will eventually boost the sentiments in the market and augur a flow of investment in a better and more transparent economic scene.

It will be a herculean task for RBI to roll out the GST Tax regimen from April 1, 2017. The task is daunting according to RBI Governor Raghuram Rajan. The new indirect tax regime will be beneficial for the economy but its impact can be assessed only after the GST rate has been decided. The RBI has also dispelled fears of a price rise.

Any inflation post the implementation of the new tax structure will be short-lived as is seen in many other countries where such a process has been implemented. However the timely implementation of the provisions of the new tax structure is a daunting task. There is no doubt that the new process will raise returns to investment across the broad spectrum of the economy and at the same time will strengthen government finances over the medium term.

The RBI governor was presenting the fourth bi-monthly monetary policy statement and said that the latest setup will boost business sentiments and also attract investment. This will be the last monetary policy statement before his term ends as a Governor of RBI in September.

In a rare show of comradely unity, both the Upper and the Lower houses of the parliament unanimously passed the GST bill. The RBI Governor was talking to reporters on the customary post monetary policy press conference and said that he is more focused on meeting the target of 5% inflation by March 2017.

Rajan added that it is a bit premature to discuss about the impact of the GST when we don’t know the rates. However past experience of countries like Malaysia where a similar exercise was carried out have revealed that the inflationary tendency is short lived. One can call it a readjustment in prices instead of a generalized inflation.

The final impact of the GST on inflation will depend upon the rate and exemption which will be granted under the new tax regime. A lot will depend upon which commodity prices will go up and which will come down.

Deputy RBI Governor Urjit Patel was of the opinion that 55% of the Consumer Price Index component will remain unaffected by GST and since the new regimen will do away with the tax-on-tax situation, the effective rate on many commodities and services will come down.

Once the base widens there will be no need to have a high tax rate and the inflationary impact will be one time only. The Consumer Price Index basket will be outside the purview of the new regimen and the effects will be minimal. The full effects of the GST will be felt only in the second half of 2017. The new tax regime will take over all the other taxes of every hue and color.