Goods and Services Tax – Finance Commission Reports

Finance Commission has released two important reports on Goods and Services Tax (GST).

First is a much awaited task force report on GST.  This report details on the GST design, the included and excluded sectors, tax rates, impact etc. The terms of reference for the task force:

(a) the GST model best suited for the country;
(b) the modalities of the implementation of GST including threshold limits, composition limits, treatment of inter-state transactions, place of supply rules;
(c) the potential tax base of the GST as exhaustively as possible and determine an appropriate revenue neutral rate for the Centre and the states;
 (d) suggest ways to incentivize states to adopt a model GST; and
 (e) recommend a framework for administering the GST including payment of compensation, monitoring of compliance and institutional mechanism for making any change in the initial design of the GST.

 The report is 170 pages and would require some reading. The main points are:

  • 12% GST rate – 5% for Centre GST and 7% for State GST
  • Exempts 3 sectors- unprocessed food, school & college education, and non-governmental health services.
  • GST to cover real estate sector
  • Road map to implement GST by October 2010

Second is a Fin-Com NCAER report which assesses the impact of GST on Indian economy. It assesses impact on economic growth and international trade; changes in rewards to the factors of production; and output, prices, capital, employment, efficiency and international trade at the sectoral level. The findings of the report were partly discussed by Mr Kelkar in his speech.

The findings are:  

  • Implementation of a comprehensive GST across goods and services is expected, ceteris paribus, to provide gains to India’s GDP somewhere within a range of 0.9 to 1.7 per cent. The corresponding change in absolute values of GDP over 2008-09 is expected to be between Rs. 42,789 crore and Rs. 83,899 crore, respectively.
  • The additional gain in GDP, originating from the GST reform, would be earned during all years in future over and above the growth in GDP which would have been achieved otherwise. The present value of total gain in GDP has been computed as between Rs. 1,469 thousand crores and 2,881 thousand crores. The corresponding dollar values are $325 billion and $637 billion.
  • The sectors of manufacturing would benefit from economies of scale. Output of sectors including textiles and readymade garments; minerals other than coal, petroleum, gas and iron ore; organic heavy chemicals; industrial machinery for food and textiles; beverages; and miscellaneous manufacturing is expected to increase. The sectors in which output is expected to decline includee natural gas and crude petroleum; iron ore; coal tar products; and nonferrous metal industries.
  • Gains in exports are expected to vary between 3.2 and 6.3 per cent with corresponding absolute value range as Rs. 24,669 crore and Rs. 48,661 crore. Imports are expected to gain somewhere between 2.4 and 4.7 per cent with corresponding absolute values ranging between Rs. 31,173 crore and Rs. 61,501 crore.
  • Prices of agricultural commodities and services are expected to rise. Most of the manufactured goods would be available at relatively low prices especially textiles and readymade garments. Consequently, the terms-of-trade move in favour of agriculture vis-à vis manufactured goods within a range of 1.8 to 3.8 per cent.
  • GST would lead to efficient allocation of factors of production. The overall price level would go down. It is expected that the real returns to the factors of production would go up. Our results show gains in real returns to land ranging between 0.42 and 0.82 per cent. Wage rate gains vary between 0.68 and 1.33 per cent. The real returns to capital would gain somewhere between 0.37 and 0.74 per cent.

Phew… The benefits of GST are just tremendous. But yeah, one can see the opposition coming from the industries who are expected to lose out.

The First Discussion Paper was recently released but did not really show promise. Hope the next ones show more promise and urgency. But knowing India’s political economy, we shouldn’t really expect anything. 

I was talking to a couple of Chartered Accountants related to GST and DTC (Direct Tax Code). Most think both tax reforms would lead to umpteen problems. The implementation is not easy at all and creates more loopholes than fills previous ones.

I also remember attending a VAT conference in 2003 when VAT was being discussed and implemented. Similar issues were raised by businessmen and professionals in the conference. However, after a few glitches VAT took off. I expect (and hope) same goes for GST as well. It is much more about willingness of political parties to get this going. Economics is well-known. The unknown is political willingness

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