GST’s gains will be formal jobs and productivity
The RBI’s working paper on its impact says India’s longterm tax burden is likely to reduce by 2530%
The implementation of the Goods and Services Tax (GST), considered to be the most important policy change in India since liberalisation, has the potential to bring about large-scale economic impact. The initial commentary on the GST revolved around benefits in terms of uniformity of tax structure, removal of cascading effect and improved government finances. On the flip side, the short-term impact is seen as a cause of lower growth in the economy. However, as we navigate through the current disruption, I feel the narrative will change to productivity gains, formal jobs and better competitiveness.
The impact of demonetisation went beyond money that was unaccounted for. It was accompanied by a move from physical to financial assets. The recapitalisation of public sector banks has been partly enabled by this tide of massive liquidity. The GST is likely to have a positive impact by way of increase in competitiveness and productivity through improvement in quality of jobs, access to formal credit and reduction in the tax burden.
The effects of the GST on compliance and resulting teething issues for small businesses are well-documented globally. However, the key difference in India is that 85% of the enterprises are in the unorganised sector. The informal sector is almost 40% of the Indian economy and employs nearly 75% of the labour force. A significant part of SMEs (in the informal economy) survive on the cash economy to evade taxes, provident fund liabilities and minimum wages to employees.
With formalisation and digitisation, financial institutions can cater to the credit needs of SMEs hitherto outside the purview of the financial system. The GST, therefore, will result in a shift in business from the informal to formal sector. Quality of jobs in formal enterprises will improve, giving a fillip to the government’s Skill India initiative.
Demonetisation brought an incremental 9.1 million people under the tax net. The GST is expected to do the same for enterprises, bringing at least a million new enterprises within its ambit.
The long-term tax burden itself is expected to reduce by 25-30% according to the Reserve Bank’s working paper on the impact of GST. The shift of productive resources, credit and government facilitation, from inefficient to efficient producers will go a long way in making the industry globally competitive. The fear of job losses in the informal economy will be more than compensated by a wider spread of employment opportunities coupled with better quality jobs in the formal sector.
The GST-led formalisation of the economy is leading us towards a more efficient and sustainable economy. Rana Kapoor is MD and CEO, YES Bank The views expressed are personal