India’s big GST stimulus: Now for the market response

Whether all Indian states would play ball had been unclear, given their revenue concerns, but to the credit of finance minister Nirmala Sitharaman, unanimity prevailed on the thrust of this reform.

Our GST structure will soon have just two slabs of 5% and 18%, plus a 40% slab for a few odd ‘sin’ and luxury goods. As across-the-board easing spells relief, so does a chapter being closed on a legacy muddle: an add-on cess to pay off a loan for shoring up state revenues. Only a few small-ticket ‘sin’ items will bear a cess to clear what little is left of the loan’s dues before we bid this bit of complexity good riddance.

Apart from a wide array of goods getting cheaper, process revisions are expected to help new taxpayers register easily and businesses get refunds faster. Working capital tied up in tax ledgers has been a bugbear for industries faced with inverted duties—or tax rates on inputs that are higher than retail-end levies, often resulting in a long wait for piled up input-tax-credit money to roll back in. The rate recast has sought to fix such inversions.

Overall, GST 2.0 counts as an impressive leap for India’s indirect tax regime.

From the viewpoint of the economy, it should serve as a form of fiscal stimulus rarely tried in India. While its revenue mop-up may fall short and disturb this year’s fiscal math, a spurt in retail consumption could also see ‘Laffer Curve’ logic taking hold if India’s GST mop-up swells on the back of an offtake boost.

In other words, the fiscal impact will depend on how tax-relieved markets respond. Should a demand uptick prove both robust and durable, it may evoke a supply response from India Inc in the shape of more investment. While weak income growth and rising debt among households can play spoilsport, we can broadly expect the spending nudge of GST 2.0 to support economic expansion.

Thankfully, so far, the government has not revived the idea of policing ‘profiteering,’ as suspected to occur when prices fail to reflect tax relief. The Centre is confident that rate cuts will be passed on, as they have largely been in the past.

For a policy to be market-oriented, it must let the pressure of competition keep unfair pricing in check, while companies should be at liberty to work out their own costs and devise various kinds of marketing strategies. Simple math can’t tell us how far price tags ought to fall. Input taxes, for example, may remain a burden in some cases where final products pay less GST (or none).

As policy stability matters for investor confidence, GST 2.0 must hold steady. Yet, an ideal regime still eludes us. Fuel, electricity and liquor, which are taxed separately, need to be drawn into GST’s ambit; fossil fuels could be slapped with a carbon tax, while booze can join tobacco in the 40% slab. Other residual oddities need to go, such as price-based slab divisions (hotel rooms, for instance).

A progressive touch does hold appeal, no doubt, but tax rates that change across thin lines tend to distort markets. GST incentives for clean mobility may also need a rethink in favour of more than just fully electric vehicles. In short, what’s good and simple can still be made better. For now, however, it’s over to the market.