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How Goa Can Gain Most From GST

THE goods and services tax (GST), a bill regarding which the Goa Assembly passed on Tuesday, is going to increase the revenue of the state. Goa will benefit as it is a consumer state. The taxation in this country so far has been based on production, not on consumption: the GST makes taxation based on consumption. So in whichever state consumption is more than production that state will benefit as it will be eligible for higher share of GST collections. GST is the single most important tax reform that was started by UPA-II and has been waiting for years to be accepted by both houses of Parliament and states. For long both the producers and consumers in this country had been pressing for the end of the regime of multiple taxation on goods and services and bringing them under one rate. The GST will replace all the indirect taxes that currently exist – the central excise duty, value added tax, service tax, octroi, luxury tax and other taxes will go with a single GST.

As far as the citizens are concerned, the GST comes as a good thing. Because under the current tax regime, the consumer pays at least 25 per cent more than the cost of production on consumer goods owing to charging of excise duty and value added tax (VAT). GST will be collected on sale of manufactured goods and services.  Since it is a consumption tax it is passed on until the last stage, wherein the customer bears the tax. Along with uniformity in taxes across states, the GST will increase tax compliance in the system. There have been frequent complaints in the past that trading establishments were collecting taxes from the consumers but not depositing it with the government. Wholesalers and retailers were doing business without proper accounting and hence without paying taxes on every sell or purchase.

Experts have warned that while the overall impact of GST on the economy will be positive, there will be initial increase in inflation. According to trade sources, the GST would drive up headline CPI inflation by 20-70 basis points in the first year due to higher prices of electricity, clothing and footwear, health and medicine and education after accounting for input taxes and potential asymmetric pricing behaviour by firms where tax increases may be quickly passed on to output prices but tax savings may not be. Certain essential items such as raw food articles are not taxed at present and this is expected to continue. As food articles presently do not have a value added tax or excise, GST is unlikely to apply. Hence, prices of essential food supplies may not change.  However, in the long term, lower tax and logistic costs, productivity gains and higher investments under GST should structurally reduce inflation. Chief Minister Manohar Parrikar referred to exclusion of petrol. The GST does not include goods like petroleum, electricity and alcohol.

Nevertheless, it is expected that GST will have a positive impact on India’s growth. The key part of GST is that it is going to end a taxation system that created borders within borders in the country. There were multiple taxes as goods produced in one state passed to consumer states. Under the old taxation system, there were distortions in allocation of resources between the central government and state governments owing to lack of precise accounting for tax credits for interstate transactions. The GST integrates the country economically.

One of the biggest positive impacts of GST on the Indian economy would be creation of a common national market. It would free investments from a major constraint. Under the current tax regime, anyone interested in setting up a manufacturing unit had to go by which state is giving the best incentives. That is, the decision of investment was based on where the investor has to pay the least taxation on production. With GST, investors’ decision to set up manufacturing units will not be guided by tax benefits. The tax will be uniform throughout the country. Let us hope the GST not only brings more tax revenue to Goa but also more investments which can generate satellite industries and create job opportunities. The boost in investments and exports from GST is going to lead to improved overall growth. According to the National Council of Applied Economic Research (NCAER), growth could increase by 0.9 per cent to 1.7 per cent. Market analysts are hoping that four sectors would benefit greatly from GST implementation. These sectors are: industrial manufacturing owing to uniform tax regime; consumption owing to consolidation of warehousing; logistics owing to more movement of heavy vehicles and house building materials owing to lower duties. Goa could look for tapping those sectors.

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