GDP to face GST hiccups: Economists–Business Standard–01.07.2017

The goods and services tax (GST) might adversely affect economic growth in the initial part of 2017-18 before providing a boost from the fourth quarter onwards, economists said.

They added retail price inflation would largely remain unaffected but inflationary expectations would persist as prices would rise for services such as premium air travel and air-conditioned hotels as well as goods such as aerated drinks, hybrid cars and fertilisers. These items have negligible weights in the consumer price index (CPI).

Rigid inflationary expectations would not allow inflation to decline significantly, though taxes paid on inputs would be reimbursed, which would have a damping effect on inflation, some economists said.

Also, the wholesale price index-based inflation will not be affected by the GST due to a new way of calculating price rise that does not take into account indirect taxes.

“The GDP will be negatively impacted  for at least two quarters by the GST as there will be transitional problems and people will be adjusting to the new tax regime,” said DK Srivastava of EY.

He said economic growth could be affected by up to 0.5 percentage points during this period. He pegs GDP growth at 7 per cent in 2017-18, a shade lower than 7.1 per cent in 2016-17.

GDP growth in April-June would be weak due to the effects of demonetisation, he added. The government’s move to withdraw currency notes of Rs 500 and Rs 1,000 dented economic growth, which was 6.1 per cent in January-March against 7 per cent in October-December.

Srivastava said the effects of demonetisation on economic growth could dissipate in the second and third quarters of 2017-18, but the economy could come under pressure from the transition to the GST.

“The second and third quarters are likely to witness some adjustment as assessees become accustomed to new compliance procedures and higher working capital requirements. The positive effect of the GST on economic activity is likely to be visible from the fourth quarter,” said Aditi Nayar, principal economist with ICRA.

She said a broad-based revival of private sector investment was likely in 2018-19 after businesses had successfully made the switch to the GST.  Earlier, Finance Minister Arun Jaitley had said the GST has a potential to raise the GDP growth by 1-2 percentage points.

The GST would boost the GDP through efficiency gains as compliance improved, said Devendra Pant, chief economist with India Ratings. “But this will play out over the medium to long term. In the immediate future, the impact on government revenues cannot be ruled out,” he added.

Soumya Kanti Ghosh, chief economist with the State Bank of India group, said the GST had the potential to add at least 1 percentage point to India’s GDP. “This will lead to creation of more employment and increases in productivity,” he added.

Madan Sabnavis, chief economist at CARE Ratings, said gains to GDP growth would come from the accounting side and not from any improvements in efficiency. He said the unorganised sector would be more accurately captured once the GST came into effect.

He did not expect prices to fall significantly enough to push demand and did not rule out the possibility of an upward pressure on prices in the short run until all players adjusted to the new tax.

However, Srivastava said the GST might reduce CPI inflation.

Nayar said the effective tax rate after adjusting for input tax credit and removal of cascading taxes was intended to be reduced on most items in the GST regime. Moreover, a large portion of goods and some services in the CPI basket were in the exempt category, she added.

Food items constitute 45 per cent of the CPI and agriculture produce is exempt from the GST. However, packaged food will attract the GST. According to some economists, 32 per cent of the CPI will be unaffected by the GST and the remaining 13 per cent among food items will be affected.

However, decisions pending on area-based exemptions and export promotion schemes could affect output prices for some companies and exporters, Nayar said.

She added the standard rate for services had been kept at 18 per cent and some services were to be taxed at 28 per cent, which was not expected as this was higher than the existing levy of 15 per cent, inclusive of various cesses. However, the availability of input tax credit may soften the impact of the GST on services inflation.

A potential rise in prices for items that had a marginal or zero weight in the CPI basket, such as premium air travel and hotels, entertainment and fertilisers, could keep inflationary expectations stubborn, she said.

The GST Council decided to raise the threshold of air-conditioned room rates in hotels that faced the 28 per cent tax rate to Rs 7,500 from Rs 5,000 proposed earlier. Room rates in the range of Rs 2,500-7,500 will attract the 18 per cent rate.

Aerated drinks and hybrid cars, which will face a cess above the 28 per cent tax rate, will become costlier, but they have negligible weights in the CPI. Cold beverages have a 0.85 per cent weight and motor vehicles have a 0.48 per cent weight.

Pant said most tax rates under the GST were close to existing tax rates, so at the aggregate level, it was unlikely that inflation would be triggered. “But one cannot rule out short-term disruptions in supply,” he added.

Ghosh said there would be competitive pricing due to reduction in taxes paid on goods and services, like a 15-20 per cent reduction in logistics costs of non-bulk goods.

Tweet FAQs

A sample of tweets received by ask GST_GoI handle and the responses issued by CBEC. The government has clarified that the replies quoted are only for educational and guidance purposes and do not hold any legal validity.

Registration:

Can we start using provisional GSTIN till new one is issued?

Provisional GSTIN (PID) should be converted into final GSTIN within 90 days. Yes, provisional GSTIN can be used till final GSTIN is issued. PID & final GSTIN would be same.

Please tell if rental income up to Rs 20 lakh attracts GST any other charge?

GST is leviable only if aggregate turnover is more than Rs 20 lakh. (Rs 10 lakh in 11 special category states). For computing aggregate supplies, turnover of all supplies made by you would be added.

If someone trades only zero per cent GST items (grains, pulses) then is it necessary to register for GST, if the turnover exceeds Rs 20 lakh?

A person dealing with 100 per cent exempted supply is not liable to register, irrespective of turnover.

Refund:

As an exporter, how do I ensure my working capital is not blocked as refunds?

Appropriate provisions have been made in the law by providing for grant of 90 per cent refund on provisional basis within seven days from filing of registration.

Composition Scheme:

Suppose I am in composition scheme under the GST. If I purchase goods from unregistered person, the GST will be paid to the government by me or not?

Yes, you will be liable to pay tax on a reverse charge basis for supplies from an unregistered person.

Customs:

What duties will be levied on import of goods?

Customs duty and cess as applicable plus IGST plus GST compensation cess. IGST and GST compensation cess shall be paid after adding all customs duty and customs cess to the value of imports.

Exports:

When goods are being imported from an SEZ, who will pay IGST?

Such supply is treated as import and the present procedure of payment of duty continues, with the variation that IGST is levied in place of CVD.

Input Tax Credit:

How will the credit/debit note from unregistered suppliers be reported to GSTN and input tax credit claimed in the same?

Like invoice, credit/debit notes on behalf of unregistered person will be given by registered person only. Further, GSTR2 provides for reporting of same by the recipient.

Supply:

Should we discharge GST liability for all reverse charge having small amounts of transaction or is any amount limit there?

It has been decided that Rs 5,000/ day exemption will be given in respect to supplies received from unregistered person. For supplies above this amount, a monthly consolidated bill can be raised.