Both AP, Telangana State, being consumer States, will gain from GST

An epochal tax reform underway

Halfway through its term, the Narendra Modi government has finally been able to put through the much-awaited GST (Goods and Services Tax) bill. It is heartening to note that almost the bill was passed unanimously by the members present in the Rajya Sabha at the time of voting. Most beneficiary States are Uttar Pradesh, Madhya Pradesh, Bihar and Odisha, because they are bigger consumer States than the manufacturers/producer States and hence their revenue collections are likely to go up.

We have to see whether it is only presumption or reality. The passage of the bill will take another couple of months as the Lok Sabha has to pass the amended Bill and half of 33States and Union Territories have to approve of it. Only then will the GST Council could be created. The council, which will comprise Union Ministers and representatives of all State governments, will then decide the Revenue Neutral Rate (RNR). While two-thirds of the voting power of the council will be with the States, the remaining vote will be with the Centre.

More important is gearing up the system for the smooth implementation of the GST Act. Earlier, when the value-added tax (VAT) was introduced in the States, many seminars were conducted to explain and educate both government authorities and the industry, trade and all concerned. I hope this time also similar exercise will be carried out by both Telangana and Andhra Pradesh State governments.

It augurs well for software companies to provide necessary software packages to the tax payers. Now, the crucial part is arriving at correct RNR. A positive development has been the Central government’s reconciliation with all opposition parties. However, fixing the GST rate will be a big issue and the rate should be such that it should neither hurt the government revenues nor, at the same time, hurt the consumers. As things are becoming complicated on this issue, I think opposition and the people should give the government able support in fixing the rate.

The government should start with 22% standard GST rate with two slabs – one lower and the other higher to accommodate all the concerned. Fortunately, if the price scenario and inflation in the market are not affected badly and the revenue collections go up, then the Government of India shall have two advantages: Tax-to-GDP ratio may go up; and sovereign rating by rating agencies will go up for India.

Unless the tax-to-GDP ratio improves further, we cannot expect the investments-to- GDP ratio improves to 37 to 39%. Without this, we cannot expect the country to make investments in infrastructure sector. Sweden, for example, had a tax-to-GDP ratio of 35 per cent as of 2014. Estonia, on the other hand, had a very low 1% tax-to-GDP ratio in 2014. As of 2014, the US tax-to-GDP ratio was 11.7%.

However, in case of major shifts in tax law or during serious economic downturns, the ratio can shift, sometimes dramatically. For example, during 2000, Australia's tax-to-GDP ratio rose to a record high of 24.2%, but during the global financial crisis, it plunged to 3.7%. Australia implemented a lot of tax cuts during that period, further depressing the ratio. India's tax-to-GDP ratio is 16.6 per cent, which is much lower than the emerging market economy average of 21 per cent and OECD average of 34 per cent.

Coming to Telangana State, the industry and the business shall see both sides of “plus and minuses.” However, I feel it will give an edge to Telangana cement industry, as the current taxes burden works out to nearly 29% and the reduction by 7 % shall give them an advantage of increasing inter-State sales across the States like Maharashtra, Chattisgarh, Madhya Pradesh, Odisha and West Bengal. To some extent, the Andhra Pradesh cement industry will also have a similar advantage.

In any case, both Andhra Pradesh and Tamil Naidu are going to be benefited by the GST. One benefit for TS and AP from the GST would be that both are more of consuming States than manufacturing States. Manufacturing States, though, will lose more revenue. The biggest concern for Telangana and AP States is about the GST rate on petroleum products, which constitutes 60% of the both States revenue. As the petroleum products are exempted from the GST RNR, the GST Council should fix the rate on higher side.

It is true that there are certain gaps in understanding the GST bill and its implementation with dual control system by both Central and State governments, I feel it is better to make a beginning and move forward. We have faced similar questions at the time of implementation of VAT, too, earlier. Finally everything was understood and implemented. (Writer is former MD, Bheema Cements)

By SRB Ramesh Chandra