03 Jul 2017 13:41 IST

Wait till fiscal end before assessing GST impact: CEA

‘We are working towards having fewer tax rates’

Chief Economic Adviser to Finance Ministry Arvind Subramanian’s proposed 18 per cent standard rate for Goods & Services Tax (GST) was used as a weapon in the hands of the Opposition when the government was firming up the slabs for the levy.

His report became the basis for the GST Council to initiate discussions with the States on the tax rates. In conversation with BusinessLine, Subramanian acknowledges that there will be challenges ahead.

“At the end of the fiscal year is when we should begin to assess GST’s impact on the economy.” Excerpts:

As an economist do you believe that GST is good? How do you see its impact on the economy?

GST has had both intellectual and political appeal across all sections, but despite that it had been difficult to achieve consensus. Bringing together divergent interests has been remarkable.

In terms of the benefits we will move towards a common market by eliminating divergent taxes. We will increase the compliance on the tax side and the anomalies where we favour domestic imports over local.

But, what are the key challenges you see in its implementation?

The two big areas where we need more improvement over time are further simplification of the structure and lowering the number of taxes and cesses over time and also widen the base.

Alcohol, petroleum, land and real estate, health, education, and power sectors need to be included over time. I will not harp over the shortfalls. But, looking ahead we need to see whether this cooperative federalism in the GST Council can learn from the challenges and work on them. If they do, it will be the icing on the cake.

Will you compare it with success rate of countries that are already having GST? Can we learn from the Canadian experience?

There are examples like Malaysia and Australia where price levels went up post GST. But, we are introducing GST after value added tax (VAT), so the transition will be more evolutionary than radical. Second, the structure of taxes that has emerged now almost guarantees that the prices will come down.

The Canada example is interesting. It is a tension between the federal Centre and the provinces. Here I feel that we are ahead of them because the GST Council works through consensus. Several States have been willing to give up on things to accommodate concerns of other States. The GST Council process has been something which makes the Canadian experience less relevant and our experience more heartening.

But, aren’t two many rates an issue…

I agree that there are too many rates. But compare it with what we had till now.

On the excise side, there were eight or nine rates and each State could have had its own rates. On the complexity side, we have improved it, but it should still not be this complex as we are striving for one market one rate.

Is one rate possible under GST?

I think we are striving for that. Maybe maximum two to three rates like I had proposed in my report. It is the medium-term goal. A lot will depend on the GST Council and how it works as a political institution. It is the political will of 29 States, UTs and the Centre. I think that I want to push back on the criticism of the GST as given the divergent interests; we have arrived at a point which is quite an achievement. Obviously, it is not perfect but if we have 30 people with 30 different interests, it is not going to be easy.

What will happen to sunset clauses?

On the exemptions, we will have a common list very soon. I don’t think we will have disparate exemption lists.

The impact of GST has not been included in the Budget and the Survey. Will the government look at it now?

I have been looking at various calculations. On the inflation, it is a reduction than an increase. Because it is a reduction, it has revenue implications. All else being equal, there could be some reduction in collections. But, the whole expectation and assumption is that some or most of it will be recouped via better compliance.

By when does the government expect GST to stabilise?

I am not the expert on this. It will depend on the IT system and how prepared people are. There are going to be glitches, but all will depend on how we learn from the glitches and how quickly we fix them. At the end of the fiscal year is when we should begin to assess its impact on GST. It has to stabilise for six to nine months and then we can assess the impact on inflation, revenues and compliance. Don’t make assessments immediately.

But, shouldn’t direct tax reforms happen in sync with indirect…

One of the benefits of GST in terms of compliance will also go on to direct taxes. If we can do the data analytics, then we can reap big benefits on the income tax side also.Benefits of GST will increase if we also bring income tax reforms. Ideally, these should go hand in hand, as we want low rates and a wide base.In India, we are low on the base because the number of taxpayers is so small.