GST and Economic Growth

[Nagesh Bajaj]

To make India as a financial super power, the introduction of GST is must. There are much apprehension relating to proposed GST regime regarding the growth in Indian Economy and its effects thereof. As we know in India economy, destination based taxation requires high compliance cost and efficient administration.

 Taxation both direct and indirect plays an important role in promoting economic growth as well as equitable distribution. As we are facing the cascading system of indirect taxes in India and with the introduction of GST, all the cascading effects of Cenvat and service tax will be more comprehensively removed with a continuous chain set off from the producer’s point to the retailer’s point. Moreover, certain major Central and State taxes will also be subsumed in GST.

 We have also experienced the benefits from the Vat reform which include the growth in economics of States and business community .

The structure of GST will be based on the destination principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to tax and exports will be relieved of the burden of the goods and service tax. International exports should be zero rated. On the other hand, International imports should be subject to both CGST and SGST at the time of importation irrespective of whether or not the imported goods are produced domestically. Moreover, GST will redistribute the burden of taxation equitably between manufacturing and services bringing about a qualitative change in the tax system. It will lower the tax rate by broadening the tax base and  minimizing exemptions.

The greatest impact of the implementation of the GST would create a common market across the country and reduce compliance costs and thus, create a equitable distribution. In the absence of significant fiscal options, incentivized policy to attract investors to states would shift to greater emphasis on structural reforms. The over macroeconomic effect of reduction in economic distortions due to GST would be to provide an impetus to economic growth. Thirteenth Finance Commission estimates the impact of the introduction of a GST which would eliminate all taxes on production and distribution and rest on final consumption only. It is also expected that the opportunities of employment will be enhanced.

The implementation of a comprehensive GST will lead to efficient allocation of factors of production and will lead to gain in GDP and exports. It would enhance economic welfare and returns to the factors of production, i.e. land, labour and capital.

The implementation of GST across goods and services is expected, to provide gains toIndia's GDP somewhere within a range of 0.9 to 1.7 per cent. The corresponding change in absolute values of GDP over 2008-09 is expected to be between ₹ 42,789 crore and ₹ 83,899 crore, respectively.

The manufacturing sectors would benefit from economies of scale. Output of sectors including textiles and readymade garments; minerals other than coal, petroleum, gas and iron ore; organic heavy chemicals; industrial machinery for food and textiles; beverages; and miscellaneous manufacturing is expected to increase. The sectors in which output is expected to decline include natural gas and crude petroleum; iron ore; coal tar products; and nonferrous metal industries."   The results of the NCAER Study are also suggested of the GST’s positive environmental impact on the economy.

Vijay kelkar, Chairman of the 13^th Finance Commission said that the proposed GST would benefit the Indian economy by at least $15 billion (about ₹ 73000 crore) per year. A fall in tax incidence on goods and services offered would enable producers to sell their products at a lower price, leading to increased demand.

Finally a more rational tax system would lead to lesser disruptions to the market economy and more efficient distribution of resources within industry.

To conclude the above ,the implementation of GST will play an important role in the growth of Indian Economy.

 

LAWCRUX TEAM

GST and Economic Growth