The Goods and Services Tax (GST) which will be introduced from July 1st, 2017 is the biggest tax reform since independence. As a destination based tax that replaces multiple taxes, the success of GST for India lies in its implementation. In its recently published report on state finances for 2016-17, the Reserve Bank of India calls GST a game changer.
The central bank states that GST in effect puts in place an effective and efficient regime for the collection of indirect taxes that will have a significant impact on state finances in the medium term for several reasons.
Here is a summation of why RBI thinks GST will prove to be a gamechanger:
- Revenue expansion for states
According to the RBI report, states that are currently reeling under an expenditure burden due to administrative expenses, pension liabilities and interest obligation could stay on the path of fiscal consolidation by implementing GST. It will lead to a definite revenue expansion over the medium to long run.
- Better co-operation between centre and states
Since GST is essentially a destination based tax, it would lead to better co-operation between the central and the state governments with regards to decision making on issues concerning tax rates and exemptions and categorising various goods and services under various tax slabs.
- Increase in the shareable pool of resources
Greater coordination and co-operation between states will lead to better understanding and the implementation of GST for businesses. This in turn will lead to an increase in the shared pool of resources and result in better allocation to states as per their needs. These factors cumulatively will lead to a significant impact on state finances in the long run.
- Improvement in fiscal health
GST tax India will have a positive impact on the macroeconomics of the nation, in the years ahead. This is because, the implementation of GST will not only boost tax revenues but also reduce administrative compliance costs. Therefore, GST will lead to fiscal consolidation without an increase in capital expenditure. Further, as business processes go through an overhaul and experience greater ease in conducting business beyond their state borders, economic activity will receive a fillip. Finally, with GST removing the cascading impact of taxes, exports are set to become more competitive. Thus, RBI envisages that GST will lead to an overall improvement in the fiscal health of the nation.
- Moderate impact on inflation and reduction in gross fiscal deficit
One of the long-standing concerns regarding the implementation of GST for business is that it will lead to an increase in inflation. RBI in its report on state finances however states that if the standard rate of inflation remains at 18%, overall price levels may in fact experience a drop due to better allocation of resources. Therefore, the impact on inflation will in fact be moderate.
The central bank also believes that although the impact of GST on government finances will be negligible in the short term, in the medium to long term, GST will lead to the increase in tax buoyancy of central and state Governments by 0.6%. This, along with the assumption that non-tax revenues and disinvestment receipts will remain unchanged, is likely to lead to a reduction of the gross fiscal deficit by 0.7 to 1.2% of the GDP.
GST is the largest tax reform that India is set to witness. GST will make tax collection and administration easier and transparent. It will bring more stability to the tax regime and attract large inflows of foreign direct investment as compared to before. Given the fact that these factors cumulatively will raise India’s growth trajectory over the medium term, RBI believes that implementing GST for business is indeed going to be a game changer.