Switchover to GST, implications

K Raveendran

The famous first freedom speech was made by Pandit Jawaharlal Nehru on the midnight of August 15, 1947. Finance Minister Arun Jaitley is all set to deliver the so-called second freedom speech on the midnight of June 30, 2017; or at least that must be the idea behind the chosen venue, Parliament House, and timing for the GST roll-out.
We know that the first one was followed by a blood bath, which devastated a nation, and the wounds of which have not yet been healed completely; the second one will most probably be followed by monumental confusion, the depth of which we currently have no idea about.
Arun Jaitley must be in a real predicament: he has to hone all his oratorical faculties to produce a ’Tryst with Chaos’ speech which will hopefully replace or at least match Nehru’s ‘Tryst with Destiny’ that conjured up romantic imageries about India for many generations and continues to inspire.
That is the most curious point that the country is looking forward to on the midnight of June 30.  There is also tremendous curiosity as to whether Jaitley will add to the confusion or remove some part of it.
There is confusion about the date, not of the speech, but the actual date of implementation, at least for some segments; there is confusion about how the rates would be applied; confusion about accounting for a service accessed by the head office of a company, for example, based in Delhi for its manufacturing unit in another state for calculating tax credit and so on.
Referring to the scheduled rollout of GST on July 1, rating agency Moody’s says teething issues in implementing the change in a vast country like India will delay the benefits of the new tax regime reaching its intended beneficiaries. It further says that the corralling of rates into four buckets of 5 per cent, 12 per cent, 18 per cent and 28 per cent has itself been a source of confusion. For instance, renewable energy-based devices attract a 5 per cent tax, but inputs into production such as solar cells and modules are bunched in the higher bucket of 18 per cent. While acknowledging the possibility of further revisions by the GST council, it says large-scale changes to the current system are unlikely.
The World Gold Council, which analysed the implications of GST on gold, said the effect of the new tax is very complex. “The devil is in the detail when it comes to tax. While the GST rates have been announced, there are several areas where greater clarity is required,” it said. The headline gold rate of 3 per cent on the face of it represents only a modest tax increase. But on deeper examination, the effect of the tax is more complex, it says. For instance, there are two important GST rates which will affect the industry. The first is the 3 per cent tax on gold products, such as jewellery. In addition, there is an 18 per cent tax on services that will apply to firms and individuals providing manufacturing services across the gold supply chain.
Taking these two rates into account, the council’s analysis of the supply chain indicates the effective tax rate consumers face could increase to between 13.5 and 14 per cent. But we often here that gold is taxed at 3 per cent under GST. The council also talks about the possibility of some consumers and jewellers trying to conduct transactions under-the-counter so that these do not get captured by GST.
Moody’s is, in fact,  showing the thumps down,  saying the impact of GST will be neutral and any positive result may be expected only over the long  term. Worse still, it says the current efforts are unlikely to rescue the Indian economy from growth deceleration, which is heightening the short term risks. These problems in the economy are being obscured by the euphoria about the GST roll-out.
In a review by Faraz Sayed and the Asia-Pacific staff of Moody’s Analytics, the agency says the Indian economy remains in a cyclical slowdown as of mid 2017. GDP growth decelerated sharply to 6.1 per cent in the March quarter, down from 7 per cent over the previous quarter.
Moody’s is not prepared to blame demonetisation alone for the slower growth. Of course, it was one of the reasons. It only exacerbated but did not cause the slide in GDP growth, it says. It attributes the mid-2016 slowdown to a sustained slump in investment and exports. The slowdown has heightened short-term risks to the economy, despite the successful passage of GST reform and robust consumption growth; because concerns around investment have intensified as investment declined 2.1 per cent in the March quarter following an abysmal 2016, when it declined 1.9 per cent.
Investment has dropped from nearly 40 per cent to 30 per cent as a share of GDP since 2010. The trend is unlikely to improve over the coming year, as both corporate sector and public sector balance sheets are deteriorating.  Moody’s cites estimates that more than 15 per cent of all credit outstanding in India is non-performing. Moreover, lending to the corporate sector fell around 5 per cent year on year in early 2017, a trend that will likely persist for the remainder of the year.
It follows from all the above that the expectations of the GST roll-out performing miracles for the economy are simply unrealistic. It is a different matter that the GST euphoria is catching fire ahead of the ‘historic’ occasion that it is made out to be. (IPA)

Monday, 26 June, 2017