It took 17 years for the vision of the then prime minister AB Vajpayee to take the shape of Goods and Services Tax (GST). Finally, the vision is becoming a reality. In fact, by the time you read this, GST might have already come into effect on July 1, 2017.
A maze of taxes with every one of the 29 states having a different local tax structure was impeding free movement of goods and services across the country. Foreign companies seeking to invest in India for a pie in the vast Indian market used to dread this tax system. The new tax regime puts an end to that era. The new regime, which turns the whole country into a single 'marketplace', subsumes 7 major indirect taxes each from the Central and state pools.
The biggest benefit it will bring on to the table is to increase the presence of organised sector and discouraging unorganised sector in a bid to increase tax compliance. It will improve supply chain and logistics efficiency across the country. Goods manufacturers will benefit, however, it is set increase tax burden on services sector in general.
On the flipside, the states are set to lose their power to offering sops and attracting new industries. Small businesses will see their compliance burden rising. However, the Centre should ensure that the promised compensation is reached to each state. In the power sector, GST implementation is set to be positive for thermal segment, while it will be marginally negative for wind and solar segments, according to a leading rating agency. The thermal segment will gain on operational front from lowering of tax on coal under GST regime from 11-12 per cent to 5 per cent, while the solar segment will see their capital costs rise by 6 per cent due to GST on solar PV, and impacting the generation cost by 11-12 paise per unit. The cost of wind generator and components is expected to go up by 4 per cent, while that of boilers, turbine and generator components used in thermal are expected to go up by about 2 per cent. The system that brings in some kind order in the process of transaction tracking and tax liability is a must in any civil society, to bring in a balanced risk-reward ratio. Otherwise the tax system will end up promoting abnormal profits for a few through illicit means, and that too bereft of tax accountability.
It is not to say that everything is going to be a smooth ride. The business community is already expressing its dissent either over tax rates or rigorous record-keeping that the new regime calls for. But the government is claiming that the GST rates were close to the existing rates for almost all business and industrial sectors. That way there is no reason to crib.
Like any other changeover, GST will also face initial pangs. Traders and businesses are likely to face some difficulties in complying with this new regime, which will increase overall costs. Experts estimate that stabilisation of new tax compliance will take a couple of quarters. However, seeking to throw the baby with bathwater would prove disastrous.
At last, the government and GST Council deserve a 'thumbs up' for tying up loose ends in time for its launch.
Let's hope for the best from GST for the economy and overall social good for the country.