Mixed impact of GST

Dr Bharat Jhunjhunwala
The Goods and Services Tax is to be implemented from July 1st this year. At present manufacturers have to separately pay excise duty and VAT on the goods sold by them. The two taxes will be combined into one GST levy. This will make life easier for businesses. They will have to fill in only one return. Interstate trade will become easier. The requirements of obtaining forms for entry of goods into various states will be eliminated. These are positive features of GST and will help increase the growth rate.
The impact of GST on the people depends upon the classification of goods. The Government must be congratulated on taking a largely pro-poor approach in the classification. To give a short list, printed books and newspapers have been placed in zero GST slab; garments of less than Rs 1,000 and footwear of less than Rs 500 have been placed in 5 percent GST slab; ghee, butter and namkeen have been placed in 12 percent GST slab; footwear costing more than Rs 500, ice cream, steel goods, and large number of other items have been placed in 18 percent GST slab; and bidi, chocolate, pan masala, washing machine, cars and bikes have been placed in the highest 28 percent GST slab. The basic approach is good. There are some anomalies, however. Mobile phones have been placed in 12 percent slab. Ordinary mobile phones and smartphones of lesser price should be shifted in 5 percent slab to encourage more use of these devices. Smartphones of higher price should be shifted to the 28 percent slab. Another anomaly is that umbrella, sewing machines, medical diagnostic kits and note books have been placed in 12 percent slab. These are “merit” goods and the indirect benefit to the economy from their increased consumption is very high. These must be shifted to the 5 percent slab.
The classification of services follows the same pattern. To give a short list, hotels with a tariff of less than Rs 1000 have been placed in zero GST slab; rail and air travel have been placed in 5 percent GST slab; business class air travel has been placed in 12 percent GST slab; air-conditioned hotels have been placed in 18 percent GST slab; and 5-star hotels have been placed in the highest 28 percent GST slab. However, there are some anomalies here as well. All rail  travel has been placed in 5 percent slab. There is a need to shift unreserved tickets to zero percent, leave sleeper tickets at the presently proposed 5 percent, and shift air-conditioned travel to 18 or even 28 percent. Also telecom services have presently been placed in 18 percent. These too are merit goods. The Government must encourage the people to use data services so that they become net-literate and they are better prepared for the opening vistas in the internet world. Most jobs in future may come from his sector. These services, especially data services up to a specified limit or 2G services should be made exempt from GST. That said the overall classification of goods and services is satisfactory. Therefore, I reckon the impact on different sections of the society will largely be neutral.
The other impact of GST depends on the overall tax collections. Presently different goods are being taxed at different rates in the states. The GST rate on the same item may, therefore, increase in one state and decrease in another. It is not possible to make an overall assessment of the total impact of GST on tax collection for this reason. GST has been implemented by about 160 countries in the world. The experience is varied. Malaysia, for example, implemented GST in 2015. A study conducted by National University of Malaysia on the impact of GST concluded that 64.1 percent people had reduced their consumption with the increase in the price of goods and services. This means that there was a net increase in the tax burden on most households. Another study from Australia showed that the bottom 20% of households paid an additional 4.4% of their income; while the top 20% of households only paid an additional 1.4% of their income. This means that the increase in GST on the items consumed by the poor was more than on the items consumed by the rich. On the other hand, Ethiopia, Pakistan and Vietnam have experienced beneficial impact on the weaker sections. The classification done by them was progressive. They placed most of the essential goods in zero rate of GST.
The way GST will play out in India is not known as of now. The impact on different sections of the people will be generally neutral because the classification of goods has overall been done decently. However, the level of total tax collection is open as of now. The total collection of GST may be more than the combined collection of excise duty and sales tax at present; or it may be less. We will know only, say, after one year when the dust settles down. The impact of GST on the economy will be negative if total tax collections increase because that will increase the tax burden on the people, reduce their purchasing power and their standard of living. On the other hand the impact will be positive if total tax collections reduce because that will increase the tax burden on the people, increase their purchasing power and their standard of living.
In my assessment, two expected outcomes of GST will not materialize, however. The expectation that GST will lead to less black economy is totally misplaced. Actually it will make it easier to undertake business in No 2. Under the present system a businessman undertaking No 2 business has to enter into an arrangement with two sets of officials from the excise and sales tax departments. Under the new dispensation he will have to make an arrangement with only one set of GST officials. Consequently it will be easier to do No 2 business now than previously. The reported benefit from catching No 2 transactions by bringing all transactions under one platform will not be attained because this arrangement was already in place under VAT system and excise duty. The tax paid on inputs was set off against the tax payable on output. There is no change in this system.
The second expected outcome of benefit to the common man from increased economic activity is also misplaced. It is true that inter-state movement of goods will become easy. But this benefit will accrue mostly to large industries that have the capacity to sell their gods across multiple states. Small businesses mostly sell their goods within their own state. Let us say ‘A’ is a small scale namkeen manufacturer located in UP. He sells his goods mostly in UP. Previously it was difficult for a namkeen manufacturer “B’ based in Nagpur to sell the namkeen in UP. Now it will become easy for ‘B’ to supply in UP. That will lead to intrusion of ‘B’ I the market area hitherto controlled by ‘A’ and impact him adversely.
(The author was formerly Professor of Economics at IIM Bengaluru)
feedbackexcelsior@gmail.com

Follow our WhatsApp channel