Long-term benefits to outstrip any immediate hiccups
New tax regime could give rise to disputes and disruption in working capital
Global and domestic economic think-tanks, multilateral agencies and tax experts believe that the implementation of GST will work as a catalyst for India’s economic growth in the medium to long term.
The International Monetary Fund (IMF), the World Bank and a number of international institutions including rating agencies believe the GST will improve India’s economic growth prospects.
“The government has made significant progress on important economic reforms that will support strong and sustainable growth going forward,” Tao Zhang, deputy managing director of the International Monetary Fund, told PTI in a recent interview.
“We expect that the goods and services tax (GST), which is targeted to be applied starting in July, will help raise India’s medium-term growth to above 8 per cent, as it will enhance production and the movement of goods and services across Indian states,” the IMF official said.
A study done by India’s National Council of Applied Economic Research (NCAER) that explores the impact of GST on economic growth due to reduction in direct cost on capital inputs pegged the improvement in growth rates between 2 and 2.5 per cent. Others have estimated the growth impact of GST on Indian economy between 1.5 and 2 per cent faster under the new tax regime.
While these projections can come true over the longterm, it is doubtful if there will be an immediate improvement in the growth rate of the economy. In fact, growth can slow down in the initial phase of the GST roll-out before the longer term benefits kick-in.
There is a consensus among most economists that the GST will be positive for the economy over the longer term as it simplifies the tax structure, increasing compliance, reduces tax evasion, expands tax base and significantly improves the functioning of the logistics network.
Muted impact
Credit rating agency Moody’s agrees. In a recent report the rating agency said that short-term impact of GST will be muted, but benefits will accrue over medium term. “The long-term benefits will include higher productivity growth, due to efficiency gains in business operations, greater investment as interstate tax barriers are reduced, enhanced tax compliance and an expanded revenue base,” Moody’s said in a note.
In the short term, GDP growth is unlikely to receive a boost as the adoption of a brand new indirect tax structure is certain to cause disruption in tax collection and administration.
The primary reason why growth can be affected, at least in the first year, will be because the tax on services that account for around 60 per cent of the GDP, is expected to increase under GST while taxes on manufactured products that make up 17 per cent of the GDP can move lower. There is a typical tendency to advance consumption if taxes are expected to move higher.
From a Government finances perspective, Central Government finances will be adversely affected in 2018 as it will have to pay compensation to supplier-state.
Credit rating agency India Ratings and Research (Ind-Ra) studied a sample set of 11,000 corporates and estimates that the input credit lock up for this sample could be around Rs1 trillion (Dh57 billion) of which about Rs500 billion could be blocked for about two months which may result in higher short-term working capital requirement for businesses in the near-term.
Even if businesses are able to achieve this seemingly mammoth task and the amounts are credited to the electronic ledger on a provisional basis, it will be subject to variations in the near term as there could be litigations on eligibility and availability under the existing laws and under the GST regime which may lead to disruption of working capital for businesses. The impact on individual companies could however vary widely and Ind-Ra’s study suggests that around 85 per cent of the blocked input credit will be with companies with greater than Rs5 billion revenues.