Economy will have to go through labour pains before GST is delivered

According to experts, GST will hit at the routes of black economy, as avenues for generating black money will be reduced to alcohol and real estate

General perception in the market was one of optimism with the last hurdle of GST being cleared. However, the party did not last long as the market which opened on Thursday with a jump of 200 points immediately met with selling pressure and pulled the market in the negative territory in the first hour itself. Some recovery was however seen helping the market close flat.

Some experts commented that market had already factored in the event in the recent run-up and a correction was due. There is no doubting the fact that Indian markets on a valuation basis are expensive. But wasn’t GST supposed to bring in a 2% jump in GDP which would make Indian markets attractive once again? Many economists have scaled down the number and we are now looking at an incremental growth of 0.1 to 0.3%. This however, does not take away the fact that GST is a tax which was long overdue.

Sachin Menon, partner and head, Indirect Taxes, KPMG India says the GST is the real black money law. GST will hit at the routes of black economy, as avenues for generating black money will be reduced to alcohol and real estate. With every transaction need to be mandatorily reported in the GST network, which tracks all reported transaction from source till consumption, it will be difficult to generate black money in a chain of transactions.

But the problem is implementation and the work and time involved for GST to become a reality. Senior economist of broking firm Ambit says, "Contrary to popular belief, the passage of the GST Constitutional Amendment marks only the beginning of a fairly tedious procedure that should ultimately result in the implementation of a unified GST in India at best by second half of FY18. Finance Minister Arun Jaitley himself does not sound too confident of his April 1, 2017 deadline.

The government machinery and corporate India both will have to gear up to meet the deadline. Software infrastructure has to be ready an plugged into government servers. Training will have to be imparted to the entire business community in the country. Implementation of GST will be the biggest challenge.

There are other setbacks too that the country will face before the entire benefit of GST will be upon us. Ambit’s economist points out that in the short-term there will be a mild pick-up in inflation as hitherto untaxed goods and services are now brought under the tax net. Nomura in a note on GST says that in the short term, GST could have a negative impact on GDP growth as higher taxes on services (which account for around 55 per cent of GDP) will hurt consumption of discretionary services. GST would drive up headline CPI inflation by 20- 70 basis points in the first year owing to its inflationary impact on various services and incomplete pass-through (by firms) of tax savings on manufactured products to consumers.

But the bigger concern of GST is job losses. Many small scale industries survive on account of tax arbitrage. Smaller companies are exempted from paying taxes. They are thus able to sell their goods in the market at a cheaper rate than the bigger ones only because of the tax advantage. With imposition of GST this advantage will no longer be present and they would be in direct competition to the efficient larger players.

Bigger companies generally have automated factories which require lesser labour. Job loss is a big concern which the government will have to address as it plans to roll out the new tax. This can add further pressure to the banking system that is still trying to come out of the non-performing asset muck.

Finally, GST still has to go through a number of clearances at the central and state level, some of which are capable of delaying the implementation.

Though markets have been bullish on GST clearing the parliament hurdle, with no clarity on rates and target dates, analysts have yet to plug in the impact in their workings. Till there is more clarity on various issues, market will digest the news and move on depending upon other developments domestically and globally.