A win-win for states and Centre

The much anticipated event has finally happened and hats off to the government’s stewardship in ably carrying this off.

The GST is a seminal reform and probably one of the most impactful ones. The aspect which appears most exciting is that India will finally have a single common market. It is akin to doing a free trade agreement within the Indian states. We had a fractured interstate trade, which is going to change with GST and an increase in productivity should be the first key effect that GST will have. With an increased productivity, tax buoyancy will follow.

The other key area where GST would make a big difference is formalisation of the Indian economy. A large part of the economy is unorganised. The workforce in this part is underemployed and has low productivity. The GST will cause a shift towards a large organised and formal economy. This would increase labour productivity and also wages, thereby boosting consumption. The decision to keep nearly 81 per cent of goods below the 18 per cent standard rate is appreciable. It would keep disruptions to the minimum and help in a smoother transition towards the new system. Lower tax rates for food articles also mean minimal price effects, which is a welcome step.

With state government interests being taken care of in the medium-to-long-term, the GST will eventually be a win-win for states and the Centre. While there will be short-term adjustment as the whole system adapts to the new way of doing things, in the long term it is very positive for the economy, capital markets and corporate India.

The government has gone out of its way to ensure there is no major disruption. The GST Council approved seven sets of GST rules, while the remaining two related to transition and returns are being vetted by a legal committee. The GST rates for select products have been disclosed wherein lower tax rates on FMCG products was on expected lines, but lower tax rates on coal and capital goods was a positive surprise. We believe that GST is a structural reform and is expected to accelerate the pace of GDP growth in India, despite near-term implementation adjustments. In other countries such as Canada where GST was implemented, inflation stabilised within the year and the Council has tried to keep rates for most items near or below the current effective tax rate. We expect the ultimate beneficiary to be the consumers and the unorganised sectors. This has been a long-standing task and will definitely help ease of doing business.