Friday, 7 April 2017

GST and its impacts

GST is now a reality. It is likely be effective from July 1, 2017.
  • GST is expected to streamline the indirect tax regime.
  • Eliminates tax cascading & reduction in manufacturing costs.
  • Simplified rules of taxation would encourage the more investment, start ups and would further increase the supply of goods and services may increase quality of products. These new players in market would more likely to be beneficial for consumer.
  • Prices of goods and services would be equal throughout the country. This will be beneficial for both the producers and consumers. 
  • It would increase tax base and GDP increase is likely 0.9-1.7%. More GDP means more money with govt  & increase in social sector expenditure which will benefit the common people.
  • Exports will be GST exempt while Imports would be subject to GST. 
  • GST will be collected at every stage of value addition (like VAT). It will be imposed at an uniform rate @ 20% (Centre 12% & State 8%)
Much is said about benefits of GST implementation, as stated above. Uniform taxation seems to be beneficial in long run only. But who is the beneficiary? No one really knows. The intermediate losers will certainly pass on burden to consumers. The intermediate beneficiaries may not pass on benefit to consumers.  They are likely on improve their bottom lines. But no one really has any scientific study/research results how Centre and States revenues will get impacted in short, medium & long runs. While long term benefits are hypothetical, short term impacts are real and will hurt middle & lower class consumers very badly. The question is most state governments that are living on edge -- will they be able to manage their revenues & expenses on month-on-month basis? Centre will see their revenues going up but how much they will pass on to states? Centre is notorious for reimbursing states with years of delays taking shelter on mere technicalities of claim details verification process. Their increased spending on welfare is unlikely. They would get tempted to undertake fancy projects to create white elephants like 'Bullet Trains' is likely.

Immediate impacts, are as given below:
  • Retail consumer prices goes up. Retail inflation shoots up. 
  • Lower & Middle class people will see their expenses shooting up.
  • Upper middle class &  rich will find manufactured goods like cars, air conditioners etc becoming cheaper.
  • Real estate prices will go up effecting realtors and middle class apartment buyers.
  • States will see their tax revenues dwindling and central help will not be on month-on-month basis. This will result in states development projects & welfare schemes impacted.
  • The only immediate beneficiary is Central Government with their coffers overflowing and will invoke every thing possible to retain money for itself rather than sharing with states. Even if it shares it will be delay of several months.
The long term benefits to people would be if the GST attracts new FDIs, consumer goods prices will become more competitive and with higher quality. Then we will also see MNCs flourishing and aged Indian companies winding up impacting older employees.

Since GST is a reality, let us wait and face it in the same way we stood in Bank/ATM queues patiently for several months waiting for 'ache din' which are usually mirages. As usual, risk & discomfort will be borne by large middle & lower classes immediately and long term benefits will be enjoyed by upper class people.

A tax regime is as good as the men and women administering it are.
Reforms are always associated with risk socialized and profits privatized.

My View:
For everybody, government's migration to new databases will generate lots of chaos & contract activity. For industrialists and entrepreneurs, a whole new system of indirect taxation is never going to be easy to shift and creates confusion & havoc for some time. For states severe disturbances in their budgets will percolate to harassing common man dependent on state welfare schemes. Like Demonetization everybody will suffer in short run while long term benefits will never be tangible and quantifiable. In a large country like India, sweeping reforms, that too without adequate preparation, are never advisable.We all know how good are taxmen. Blatantly corrupt. In fact they actively assist erosion of taxes for their self enrichment. Modi's philosophy of 'bear short term pain' (by lower classes) for long term benefits (which will be garnered by upper classes only) and trickle down theory is unacceptable non sense. But authoritarian Modi, will never listen to reasoning. As Amartya Sen remarked - for the impacts of these actions to sink into the brains of masses will take several months time and until then he is safe on his 'gaddi'. It is better to get rid of him at the earliest, in the best interest of nation. For now expect and bear period of heavy inflation which will be painful for common man. 

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