GST and India's competitiveness

Over the past few weeks, there has been a growing interest among media in India's indirect tax regime. On one side are those who believe that the proposed changes in the regime will lead to greater centralisation and this will limit the ability of states to impose a tax that they deem fit. This, according to them, is not a very welcome step (since it goes against the idea of greater competition and competitiveness at state level).

On the other hand are those who believe that the proposed Goods and Services Tax (GST) has to be looked at from the perspective of cooperative federalism with greater harmonization, leading to greater competitiveness.

Finance Minister Arun Jaitley, while introducing the 122nd Constitution Amendment Bill, 2014 (to facilitate the introduction of GST) in the Lok Sabha during the just concluded winter session of parliament, called it the "biggest tax reform since 1947.”

The measure tries to do away with multiple rates and imposes a dual structure of GST, with a state component called an SGST, and a central component called a CGST. The proposed combined rate of CGST and SGST (called the proposed GST rate) is 27 per cent, which will make it one of the highest in the world and in a league of countries like France and Belgium.

At present, there are different central and state taxes (that result in complexity) that will be subsumed by the proposed GST. These include central excise duties, additional excise duties, service tax, additional customs duty and special additional customs duty under the central level taxes and value-added tax, sales tax, central sales tax, entertainment tax, octroi, entry tax and luxury tax under the state-level taxes.

All these state and central level indirect taxes had given rise to double taxation, greater litigation, ‘unease’ of doing business in India and uncertainty of tax incidence on investment in manufacturing and services, thus discouraging investment.

The Vajpayee government first took up the idea of GST in 2002. Subsequently, the Manmohan Singh government took up the idea when it saw success with the implementation of a Value Added Tax (VAT) as a replacement for state sales tax in 2005. In November 2007, the Empowered Committee of State Finance Ministers decided that the solution for indirect taxes is a GST to be levied by both levels of the government. The subsequent Manmohan Singh government failed to act on the advice given by the taskforce on GST of the Thirteenth Finance Commission. The GST proposal was derailed due to the kind of changes required in the Constitution as well as in getting all the states on board with the idea. Fast forward to 2014 and this is still a likely threat.

A report by the National Council of Applied Economic Research (NCAER) in 2009 had stated that implementation of comprehensive GST could provide gains in India’s GDP somewhere within the range of 0.9 to 1.7 per cent.

The Thirteenth Finance Commission’s task force report also estimated that the present value of total gains arising out of GST to be between $325 billion and $637 billion using a three per cent discount rate in 2008-09. The figure was approximately one-third to half of India's GDP in 2008-09.

Finance Minister Jaitley will do a great service if he can get the bill passed by two-thirds majority in both the houses as well as get it ratified by 50 percent of the state legislatures.

The date of April 1, 2016 may very well be a game-changer for the competitiveness of Indian industry.

By: Amit Kapoor