Its benefits will be felt over a period of time
The Cabinet’s clearance of the Goods and Services Tax (GST) Bill for introduction in Parliament in the current session is very important since the legislative process for getting GST in place is a very long one. After the Constitution Amendment Bill is passed by a two-thirds majority in Parliament and ratified by at least half the state assemblies, the GST law itself will have to be passed by the Centre, and then, by each of the 29 states in the country. Getting the states to agree to zero-rate petroleum duties is a very big step, but it is important to keep in mind the process is still very fluid and a lot depends on how the system is run. The crux of a successful GST, and that is where all the enthusiasm for it comes from—and the estimates of how GDP will grow once GST is in place—is the revenue-neutral-rate (RNR) as well as what it does for the border check-posts. As long as there are lots of goods outside GST—like alcohol for instance—this will prevent taxpayers getting credits for the taxes already paid by them on various inputs. And the greater the number of exemptions—this does not apply to petroleum goods for which the VAT rates are higher than on most other goods—the higher the RNR. Also, to the extent various goods are kept outside the GST, and their rates differ dramatically across states, chances are border check-posts will remain.
In other words, it is important to keep in mind that GST is not, as yet, the game-changer it is being made out to be; it is not an event, it is a process, and a process that can take several years—it took over 5 years for the VAT process to get into shape, with rates across states coalescing to similar levels, and even after that, several states have started rolling back part of the VAT system by denying input credits on various goods. If, for instance, as a report by Kotak Institutional Equities Research points out, service tax rates are raised to 16% and tax compliance increases so as to double revenues, the RNR could fall from 20.4% to 15.7%—once the RNR falls, with the GST network in place, chances are compliance levels will also rise dramatically. If the GST does come into place by April 1, 2016, it will take at least 3-4 years for its full impact to kick in if all goes to plan.