Although lower Goods and Services Tax (GST) will reduce inflation, it won’t lead to economic growth significantly in the short term. However, according to experts, it is definitely going to benefit the Indian government in the medium term. The majority of economists predict inflation to come down as the GST rates for most of the goods have already been fixed at a special rate, which is pretty low.
The introduction of GST will prompt India Inc to reorganize its business as the nation switches itself to the regime of GST pulling smaller companies into the tax bracket. There are lots of imperfections in GST but at the same time, it could also usher noteworthy benefits as well. It is going to give a quantum leap in logistical efficiencies and transaction trails. Let’s take a look at the few impacts of GST soon.
#1: GST will shake corporate operations
With the new GST taxes, many companies will have to restructure the way they operate their business. Now companies have to insist their suppliers and vendors give invoices as GST will make it extremely strict for companies who had been evading taxes. The bigger companies can reap benefits from GST as they have a supply chain that can offset taxes that are paid on inputs. As compliance cost will rise, smaller companies may have to spend more.
#2: Passing the benefit of low taxes
Finance Minister, Mr. Arun Jaitley will keep close supervision on whether or not the companies are passing over the benefit of low taxes to the consumers. Experts believe that corporates will pass the advantages of GST but they would have a goal of retaining the indirect benefits from their tax savings in the form of costs of logistics, streamline of business process and flow of input credits.
#3: Inflation will be low enough
Analysts believe that the fact that inflation will stay low as GST rates on imported goods will be either excluded or kept lower. But, assuming that GST has the intended impact of increasing tax compliance, the burden of taxes would increase, and this was said by Morgan Stanley in a note. The companies would pass on costs of higher tax compliance to the consumers at a later stage.
#4: RBI might not curb rates in June
Inflation is expected to ease off further with the rollout of GST from a record low of 3% in April and as per analysts, RBI would not lower policy rates immediately. RBI will watch out for monsoon progress and even how the GST pans out. In the last policy RBI has flagged issues that the one-off GST impact might not even be inflationary.
While the GST is going to be positive for promoting economic growth in the short term, it will also improve the ease of running a business, luring more foreign investors and bolstering investor sentiment.
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