GST rollout delay may crimp growth to 3.5%, say economists

Stiff resistance to the goods and services tax (GST) by legislators in Parliament on Friday has dampened the spirits of the economists and tax experts. 

The Constitution Amendment Bill for the introduction of the GST was moved by the finance minister Arun Jaitley in the Lok Sabha even as Congress, TMC, Left and the NCP staged a walkout after their plea for referring the bill to the standing committee was declined. The AIADMK and the BJD expressed their opposition to the bill too.

Amit Kumar Sarkar, partner, Grant Thornton India LLP, said if the rollout of the GST is delayed beyond April 2016, India will remain straddled to the Hindu rate of growth, with fiscal bottlenecks that could keep it from realising its full potential. 

The term Hindu rate of growth was coined by some economists to refer to the low annual growth rate of the planned economy of India before the liberalisations of 1991, which stagnated around 3.5% from 1950s to 1980s, while per capita income growth averaged 1.3%.

Sarkar said it was depressing to see it is being blocked at the constitutional amendment stage itself despite Jaitley exuding confidence about having broad consensus on GST.

“Jaitley, in his budget speech, had said that there was a broad consensus on GST but it is depressing to see that there is no seamless consensus and is not able to cross the very first step (of constitution amendment) in the parliament,” he said. According to him, there was nothing fundamentally and economically wrong with the bill.

The GST, deliberation on which began in 2004, has been stuck due to states’ fear of losing revenues once all the central and state indirect taxes – excise, service, VAT, octroi, luxury, entertainment and entry – are bundled into one. Assuaging their fears, Jaitley said GST will not only simplify and harmonise tax regime, but is also expected to reduce cost of production, which will have a positive impact on inflation.

“Lower cost of production will make Indian industry competitive, domestically and internationally. GST will broaden the tax base and result in better compliance due to a robust IT infrastructure,” said Jaitley during his speech in the parliament. The minister has claimed the GST will add 1-2% to the GDP growth rate. The government has proposed inclusion of an article for allowing manufacturing states to levy additional 1% for three years in lieu of entry tax.

The Centre has also undertaken to underwrite the losses that could be caused to the state from the new tax. Under this, 100% of states’ losses will be compensated in the first three years, 75% in the fourth year and 50% in the fifth year. Jaitley said the consensus was arrived after extensive deliberation on the issue by the standing committee and empowered committee of state finance ministers.

Sarkar said the concerns over loss of revenue by states are unfounded as there is sufficient protection provided in the amended constitution to them. He also said past experience of VAT, when the revenues shot up 44%, is a proof there will only be revenue gains from GST too for the state.

“After the VAT replaced the sales tax, revenues went up 44%. Studies have found that even GST has the potential of increasing revenues by 44%,” he said. He even said the 27% revenue neutral rate (RNR) being suggested by government officials was excessive and could spell bad news for middle class. The RNR will be fixed by the GST Council after the GST bill is passed in the parliament. The Kelkar Committee, which came out with a report on GST, had said the bundling of state and central indirect taxes would bring it down to 6%.

“If it (RNR) is shooting up to 27% then somebody is not adding things up properly,” said Sarkar. Controversially, the government has decided to exclude some products and sectors from GST, which could inflate the RNR.