The macroeconomic impact of introduction of the Goods and Service Tax (GST) could turn out to be significant in the years ahead, the Reserve Bank of India (RBI) recently said in its report titled 'State Finances: A study of Budgets of 2016-17'.
It said that GST implementation is likely to boost the small and medium scale enterprises (SME) sector by (i) improving their ease of doing business; (ii) lowering logistical costs; (iii) extending outreach beyond state borders; and (iv) aiding SMEs dealing in sales and services.
Furthermore, economic activity would also benefit from exports becoming more competitive as the GST regime will eliminate the cascading impact of taxes, it added.
The report clarifies that besides giving a major boost to tax revenue, the larger impact on the fiscal health would be from reduction in the administrative compliance cost. GST is likely to be supportive of fiscal consolidation without compromising capital expenditure.
Under the prevailing tax structure in India, investment is discouraged through the application of excise duties and VAT on capital goods, for which no set off or input tax credit is provided. For example, input tax credits are not allowed for union excise duties on capital equipment acquired for non-manufacturing sectors; similarly, no credit is allowed for the state VAT on capital goods acquired by the services sector, report added.
The Subramanian Committee (2015) assumed an elasticity of investment demand with respect to price at (-) 0.5 and an incremental capital output ratio of 4 and inferred that GST could increase investment by 2 percent which could propel growth by an incremental 0.5 percent although an earlier study had projected GDP growth to increase by 1.7 percent (NCAER, 2009). A recent study, however, posits a much higher incremental growth impact of 3.1 - 4.2 percent based on alternative scenarios of the likely aggregated GST rate due to surge in manufacturing activity and trade (Leemput and Wiencek, 2017).
The implementation of the GST should also boost domestic business confidence, including among foreign investors by assuring a stable and transparent tax system, free of cascades and distortions, it added.
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