GST to be litmus test for govt: Report

Sanjeev Sharma

Tribune News Service

New Delhi, June 23

The GST reform will be a litmus test for the government as the economy begins another phase of adjustment, just as activity had begun to stabilise after post-demonetisation dip, according to a research report by Singapore-based DBS Group.

The report said teething issues are likely and the impact is expected to be mixed in the near-term but beneficial in the medium to long-term.

“Implementation of the GST system will be a litmus test for the government’s ongoing reform agenda ahead of the 2019 General Election. Despite initial teething issues, we expect the negative impact to even out over the course of the year. Tangible and intangible benefits from the GST regime should boost the economy’s growth and rating prospects”, the report said.

Among the benefits expected from this reform are breaking down inter-state tax barriers and removing the cascading impact of taxation should lower business costs, improve competitiveness and boost growth. In addition, a simplified and transparent tax regime should attract investment, improve revenues, widen the tax base and ensure compliance.

The report adds that given the scale of the changes, implementation will be challenging. The extent of readiness among businesses, consumers and the collection network will be the biggest challenge apart from the regulatory machinery.

Most large companies are geared up but the same is not true of small and mid-sized firms, especially in the unorganised sector. Teething issues are expected but should fade in subsequent months.

DBS estimates that the near-term activity is likely to be temporarily hurt by delayed consumption and investment decisions. Few of the businesses which were previously outside the tax scanner now fall within. Manufacturers and retailers/wholesalers are in midst of clearing stock ahead of the rollout. Service sector providers will now also fall under the states purview, in addition to the Centre.

“With our FY17/18 real GDP forecast at 7.3%, growth could moderate by 20-60 basis points, estimating from the post-VAT impact and global references”, the report added.