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Economic Significance of GST


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Category:  Economic  
| 10-08-2016 03:42 PM


GST

To put it in a nutshell, introduction of GST in India is expected to usher the ‘ache din’ for which the aam admi has been waiting ever since the BJP lead by Prime Minister Narendra Modi was put into the driver’s seat. 

There can be no doubt that GST is the biggest tax reform that Independent India has seen so far.  Let us take a deeper look at how this will pan out for the common man in the days to come. Remember however, that it is still a good 7 months before GST is implemented.  One look at the enormity of work that needs to be completed before the scheduled roll out on April 1, 2017 gives the impression that the full benefits of the exercise may flow into the pockets of the aam admi only closer to 2018.

Tax compliance

Post GST, there will be only one tax charged at the point of consumption. All taxes paid between raw material/procurement right up to the consumer will be credited back to the players within the supply chain.  Hitherto, goods and services suffered a tax on tax making it significantly more expensive for the end consumer. Without tax compliance, the intermediaries between the manufacturing point and consumer will not be able to claim tax credit. This will encourage tax compliance and therefore lead to enhanced revenue for the state.

Enhanced productivity

GST would make supply chain management much more effective.  Manufacturers need not worry about different tax rates, local levies and other incidentals to carry on their activity. With a uniform rate of tax applicable across the country, manufacturers can heave a sigh of relief and focus more on productive work than wade through a sea of tax provisions in different parts of the nation.

Profiteering

It would be a good 12 to 15 months before the impact of GST can be seen on the pricing.  While some manufacturers may be tempted to keep the extra profit, competition is expected to work as a deterrent. The government on its part is also likely to keep vigil over undue profiteering to ensure that the benefits of GST reach the common man.

Boost to economy

With the implementation of GST, the general economic climate in the country is expected to get a shot in the arm. Although it could consume several months before the current initiative achieves smooth sailing, tax administration and tax compliance are expected to improve significantly.  Consequently, productivity should improve in many sectors bringing indirect benefits for the aam admi.

Some sectors will see a price surge

Currently certain sectors like textiles and footwear enjoy a tax rate around 10%. Since GST is uniform across sectors, the aam admi should be prepared to part with a few extra rupees on these sectors. However, considering that we do not buy footwear or textiles every day, the additional expenditure should be more than offset by gains made more frequently.  For one, your movie tickets are slated become cheaper by a few notches!

Do let us know if you liked this article by commenting below!


Sunil Patni, CFA
Financial Research| Business Analysis| Product Development

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