“There is no perfect system of GST. It evolves over time,” said Chief Economic Adviser Arvind Subramanian, noting that this was also the case with the state value-added tax.
In an interview to BusinessLine, he said the current model of GST may be different from what he had recommended, but stressed that it is a good model given the political complexity of India.
Subramanian, who wrote the report on revenue neutral rates for GST, said the new tax system will create growth potential but cautioned that there will not be a sudden upsurge in investments as that depends on other macro-economic factors too.
The GST structure will be decided by the GST Council. States, I think, have not done serious calculations as yet. They are understandably concerned as they are entering into unchartered waters. Services taxation is new to them. It is not surprising that they feel apprehensive and feel the need to preserve their revenue through higher rates of tax. But we also know that higher rates can backfire and lead to problems like lower compliance.
The Congress has referred to your report, which suggested a revenue neutral rate of 18 per cent for GST. But States want a higher rate…
The combined tax of 27 per cent is on manufacturing only. That is not the calculation. It has to be the average of (tax rates) manufacturing and services and revenues will be buoyant over time. You can’t just look at one component. The presumption is that cesses will be rolled into GST, except cesses on petroleum (which is out of GST).
How will GST impact the economy in terms of inflation and boosting GDP growth?
We had calculated the inflationary impact of GST in our report. If by definition something is revenue neutral, it will not have an impact. Second, as the Finance Minister pointed out 54 per cent of the basket of items in the consumer price index is exempt from GST. Lower the standard rate, lesser will be the inflation. Our report said a standard rate of 18 per cent to 20 per cent will have no impact on inflation.
I have not done any calculation on the impact of GST on GDP. There will be a big impact on the whole movement of goods within India. Also, as we pointed in last year’s Economic Survey, the countervailing duty exemptions will go away and compliance benefits will improve. It will impact Make in India and reduce barriers to trade, which will create a potential for growth.
Investors have been keenly waiting for GST. Do you think investments will suddenly rise now?
Investors believed that the political mandate needs to translate into some big policy decision. It’s as much a signal about using the mandate as the content of the reform.
The rise in investments will be gradual….the whole narrative was if you do one thing, everything will change. It is a series of things that help investments including macro-economic factors such as private investment, twin deficits. There is no magic bullet.
How will the guarantee on full compensation for revenue losses impact the Centre’s finances?
We don’t know what the compensation will be. My instinct suggests that the losing or manufacturing States also have big urban consumption centres. So there seems to be a natural cushion.
But, we have to wait and see. And then if there are claims for compensation, there are two to three choices – either you say raise the GST rates, or reduce expenditure or let the deficit adjust. In the report, we have said that compensation is temporary and structure of rates is permanent. Don’t burden the permanent with the temporary.
The proposed model of GST is far different from your report had suggested including real estate and alcohol in its ambit?
If you look at across the world, there is no perfect system of GST and it evolves over time. That’s what happened with State value added tax also. We shouldn’t let the best become the enemy of the good. It has to be a learning curve, especially in complicated political systems.
Will GST impact the ability of States to compete and attract investors through lower tax rates?
To some extent, it is a fair point. But we could argue that in a country like India we don’t want this undesirable race to the bottom. States can compete by offering better infrastructure and services.
Do you think April 1, 2017 is a feasible target for the roll out of GST?
Let’s just work towards the date. The government is committed to it and is making preparations. For this, all three GST laws have to be passed in the Winter Session.