THE passing of the goods and services tax (GST) bill in the Rajya Sabha is one of the biggest economic reforms since the country launched itself on the road to liberalization in 1991. It had been stuck up for years, partly because of various reservations among states and partly because of differences on some aspects between political parties. The silver lining was that there was a broad consensus on the idea of ‘One country, one tax’ being good for all – the consumers, the manufacturers, the traders, the retailers as well as the public treasuries of the state and central governments. The GST will be one indirect tax (direct tax being on income) in lieu of a number of indirect taxes levied on goods and services by the central government and the state government. To name just a few, under the current system the central government levies excise duty and customs duty, while the state governments charge VAT, entertainment tax and luxury tax. The plethora of taxes and the duality of taxation authority lead to higher taxation of the end consumers, because often they have to pay tax on goods and services whose prices include the tax already paid by the manufacturer or service provider. The GST will include all these central and state taxes and be realized as one single tax.
Hitherto, because of the different taxes and different levels of taxes charged by every state, the country from taxation point of view was divided into as many markets as states. Manufacturers, traders and service providers had to price their goods and services taking into account state-specific taxes, apart from the central taxation. According to one estimate, the plethora of diverse state-level taxes and levies came to around 25-30%, or even higher in the case of some sectors. And all this had to be paid by consumers. The GST is going to make India a single unified market: the state barriers will disappear. A single tax will ease the movement of goods across states, encourage business expansion and facilitate easy procurement. This will enhance the ease of doing business. Manufacturers and retailers will not need to keep goods in warehouses in different states: they can keep it in few warehouses and supply the goods from there. The cost of supply chain logistics will come down significantly for them. With lower costs incurred in logistics and storage, there would be more capital in the hands of manufacturers and retailers to invest in expansion or diversification.
With costs and expenses for the manufacturers, retailers and service providers coming down, they are expected to pass on the cost reduction in the form of price reduction for their goods and services, which is going to benefit consumers. With the GST in place, there is going to be a tougher competition among business players for consumer attention and market share: this competition, in addition to the lower costs, is also going to cause reduction in end prices of goods and services. So, the first good thing to come out of GST is expected to be lower prices the consumers will have to pay for goods and services.
Prices are expected to come down further with lower incidence of taxation. The primary benefit the consumers of India should be getting out of GST is reduced indirect taxation. Indirect taxation makes about 55% of the total tax collection in the country. Middle class people usually crib about having to pay too much income tax, but they do not realize that the indirect tax they pay in terms of central and state taxes is more than what they pay as income tax. The single indirect tax is going to be lower than the total of indirect taxes the consumers have been paying. The quantum of reduction would be known only after the central government works it out before it presents its budget for 2017-18.
Another good result of a single indirect tax would be that chances of indirect tax evasion by manufacturers, traders, retailers and service providers with or without the complicity of consumers will be greatly reduced. With a single indirect tax, it would just not be possible for anyone to get away without paying it. With the scope for evasion of indirect tax eliminated the room for direct tax evasion will also be much less, for one depends on the other. And with less direct and indirect tax evasion, the government revenues will increase, reducing its deficit and boosting government spending on infrastructure and other sectors. The increase in government spending and increase in consumption, production and investment will increase the gross domestic product (GDP).