India took one further step towards implementing a uniform indirect tax, replacing about 17 existing taxes, across the country when the Rajya Sabha passed the Goods and Services Tax (GST) Bill after a seven-hour debate on Wednesday. However, the impact of the law — which has to face tougher hurdles in the coming months — need not be positive for all after it comes into force from the intended date of April 1, 2017.
The passage of the Bill had more to do with politics than economics. "The passage looks more like a political achievement and political compromise/face saving at this point with a lot of nitty-gritties postponed to a later date," HDFC Securities said in a note on Thursday.
Negative now, positive later
The benefits are mixed for India, currently the world's fastest-growing economy. A lot depends on the rate itself, given that it would be higher than some of the existing rates and lower than the rest.
"The move to a GST regime will be beneficial for the economy on multiple counts, even though there are likely to be growth, inflation and fiscal implications. Price impact will be highest if a single GST rate is adopted, but it is more likely that a tiered system would prevail, maintaining food and essentials at low rates whilst sin taxes form the highest bracket," Radhika Rao, economist, group research, DBS Bank said in a note on Thursday.
Its impact on economic growth will be negative in the short-term, as the benefits of the GST will start accruing only over a period of time, she added.
The GST regime would significantly diminish the role of the informal sector, which employs people in huge numbers. This can be politically suicidal, especially at a time when a slew of state assembly polls are round the corner, for instance in Uttar Pradesh (March 2017). This could well make politicians go slow on implementation.
"The main reason for our politicians taking it easy on GST implementation is the fear of job losses. Specifically, whilst the formal sector (especially large-midsized companies) will benefit from GST (scale economies around manufacturing and logistics), the casualties will be the small businesses which currently fly under the radar of the taxman. The latter sector accounts for 6x as many jobs as the former sector. The initial impression is that GST will ipso facto benefit the organised sector at the expense of the unorganised sector," HDFC Securities said.
The 'snake' analogy
The services sector, which accounts for more than 50 percent of India's $2 trillion gross domestic product (GDP), is likely to take a big hit as and when the GST regime comes into effect. This is so because the existing service tax rate of 15 percent would be replaced by the standard rate, which is widely expected to be around 18 percent or more.
Therefore, eating out, telephone bills, stock market trading, recreational services and many more are bound to become costlier after GST is implemented. This has apparently prompted HDFC Securities to say, "Services companies are looking at the GST as you would look at a snake."
Further, if petroleum products are kept out of the purview of the GST, the purpose of such a law will be defeated.
Gainers and losers
Automobiles, consumer durables and media and entertainment are poised to benefit from the GST while telecom and hospitality sectors could see some marginally negative effect due to service tax rates moving higher to 17-18 percent from the current 15 percent, according to a note by Kotak Institutional Equities.