By Martin Patrick

The implementation of the long-pending indirect tax reform – Goods and Services Tax (GST) – has become closer to reality with the passing of the GST Constitutional Amendment Bill in the Rajya Sabha on August 3, 2016 and further with approval of the amendment by the Lok Sabha on August 8, 2016. There is still a long way to go and many hurdles to surmount before the GST becomes a reality.

In fact, there are many formalities and procedures to complete for the rolling out of GST from April 1, 2017 onwards. It is expected that the GST Council will be formed at the end of September. There will be six more months to complete other formalities. The crucial problem will be the passing of the State GST Bill by at least 16 States i.e. more than half of the States in India. It is hoped that all the formalities will be over by February, 2017 and the Bill will be rolled out from  April, 2017 onwards.

It makes the country a single market.

GST, an indirect tax reform, is a value added tax applicable to both goods and services. It is essentially a tax only on value addition at each stage, permitting a supplier at each stage to set-off, through a tax credit mechanism. The final consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. It subsumes several taxes that exist at the Union and State levels such as VAT, Central Excise Duty, Entry Tax, Octroi duty, Purchase Tax, Entertainment Tax, State cesses and surcharges, etc. There will be one indirect tax in place of many taxes and there will be two or three slabs (rates) in place of multiple rates. The tax is imposed not on the origin but on the basis of the destination.It makes the country a single market.

GST Bill

In historic tax reform, Rajya Sabha passed the GST Constitutional Amendment Bill | Photo Courtesy:

Impact on Kerala’s Economy

The impact of GST on Kerala’s economy can be analysed in different ways. The first and foremost analysis is from the perspective of the State being a member of the Indian federal system. Whatever benefits the country enjoys and the pitfalls it suffers from, the State will also be a partner of that. However, a sector-wise analysis can be done initially.

The broad analysis of the economy into primary, secondary and tertiary sectors is a difficult affair due to the paucity of data and related information. But one can consider some important sectors that exist in these broad sectors, particularly in the secondary sector initially. Whether rubber, tea, cashew, and coir industrial sectors etc., will benefit out of GST cannot be discussed at this stage, as the rates have to be known. The rates will be determined after the formation of the GST Council only. For instance, the tea industry expects an exemption from GST and the same is the case of the coir industry. The rubber industry, however, keeps an optimistic outlook. The industry expects a long-term gain due to improvement in ease of doing business and removal of cascading effects of taxes.

There is a chance that the export sector in the State may benefit from the GST due to its simplification and compliance. The cashew industry, marine industries, and handloom industries may derive a benefit out of this.

Information technology is another sector that may find GST beneficial. However, there are mixed feelings about this.

The tax system will be transparent and the incentive for ease of doing business would indirectly benefit the information technology sector. Online trade is another area that would provide more revenue to the government. Earlier this year, the Comptroller and Auditor General had asked the State to bring e-commerce giants, who had been evading VAT in the State because their point of sales was elsewhere, into its net. Reportedly, the State accounts for about 1.48 per cent of online sales and loses about Rs. 174.33 crore in unpaid taxes.

Secondly, the impact can be analysed from the viewpoint of Kerala as a consumer State. This is because the State consumes a whopping 15 per cent (given its size and population) of what the country produces. It is generally believed that GST will be beneficial for a consumer State like Kerala. With the existence of inter-state tax and several other taxes, the consumers in Kerala pay a higher price for many commodities. The GST will help to reduce the prices of many commodities that Keralites consume, especially with the removal of the Inter-State Sales Tax.

Drugs manufactured by pharma companies currently come under the tax rate of 12-14 per cent. In the new GST, it is likely to be fixed at 18 per cent. As a result, the prices of drugs may go up, an adverse impact for a State where healthcare is given due importance.

Another sector is the consumer durables one. There are a number of unorganised producers as far as this sector is concerned. There is a price difference in consumer durable products, between branded and unbranded products, to the extent of 10-15 per cent. This will be removed by GST through its single tax system and, thereby, the organised players will be benefitted.

This will be a threat to the smooth functioning of unorganised players in the consumer durable products sector of Kerala.

In the automobile sector, the prices of bikes and small cars will be slashed down. Currently, the Centre and State together charge 23.5 per cent on taxes on a small car. Under GST, this will come down to 18 per cent and thereby the prices of small cars will by decreased by Rs. 12,000 to Rs. 45, 000, depending on the price of the car.

The replacement of Entertainment Tax and VAT by an 18 per cent GST rate in place of current 21-22 per cent, will lower the tax burden for multiplexes, making it another advantage for Kerala. This is good news for multiplexes throughout the country.

The importance of the service sector is always pointed out by many as a factor in favour of Kerala. It is known that the service sector contributes more than 60 per cent of the State’s GDP. But contrary to expectations, it contributes 1.30 per cent to the national service tax revenue. The reason for this is the existence of a large number of small traders in the State economy. Their sales turnover is less than Rs. 10 lakh per year and hence they are exempted from Service Tax. Naturally, our expectation that the State may benefit from GST may not be fulfilled.

Inflationary and Other Concerns

There is also a chance of increase in prices of many services we consume. Currently, the service tax rate is 15 per cent, including cesses. It is expected that the GST rate would be 18 per cent. One cannot overlook the chances of it being fixed at 22-24 per cent. As a result, the cost of legal services, banking and financial services, insurance, transportation and logistics, chartered accountant services, dry cleaning services, etc., are likely to be costlier. This may lead to some sort of inflation in the State, at least for a short period.

Thomas Isaac, Finance Minister of Kerala, has expressed concerns over whether the GST will deprive the States of their due from the divisible tax pool.

According to him, the amendment to clause 10 of the Bill seeks to establish a new framework for distribution of Central taxes, which goes against the basic design that all taxes collected by the Union government in any year should form a part of the divisible pool and should be apportioned among the States. As against the general feeling that all taxes should be shared, the Bill approved by the Rajya Sabha and the Lok Sabha states that the sharing of revenue has been confined to certain taxes only, and hence it would not be as advantageous to the States as projected earlier.

Amit Misra, Finance Minister of West Bengal, expressed the same concern with respect to sharing of IGST revenue of unclaimed credits. There are some other problems too. One is the Revenue Neutral Rate (RNR) 1. The latest thinking is that this should be around 22-24 per cent. If so, the entire country will witness high inflation for a minimum period of three years. We have evidence from Nigeria and Malaysia to support this argument.

Issues such as tax rates, exemptions, and threshold limits are other concerns to be finalised.

Issues such as tax rates, exemptions, and threshold limits are other concerns to be finalised.There has to be a consensus around a Model State GST Act and the IGST. Then only can one clearly depict the exact impact of the GST on Kerala economy.


RNR 1 is the rate of tax at which States will not have any revenue loss. The global average of GST rate is 16.4 per cent. With the implementation of GST, inter-state tax will be abolished. Domestically, this would help to lessen the prices of raw materials and machineries and, thereby, Kerala will be benefitted. The State government has to utilise this opportunity to declare a conducive industrial policy, so as to have further momentum in industrial development. Globally, the message passed to the international community is that tax procedures have been made simple through the rolling out of GST. This will give international investors the feeling that complicated tax procedures are replaced by simple tax procedures. This opportunity has to be tapped by the State government, so as to bring in foreign direct investment.

To conclude, GST will help contain the transaction cost and save time as there will be less paperwork owing to the removal of so many layers of taxation. Tax compliance will be improved further.

But, the possibility of inflation, especially in the initial years, will be high in Kerala.

No doubt, the success or benefits of GST depend on the determination of a fair standard tax rate, exemptions, and compensation to the States. A scientific and logical discussion about the impact of GST on Kerala’s economy can be done only after getting the information relating to these aspects.

Dr Martin Patrick is Chief Economist at Centre for Public Policy Research.

This article was originally published on Centre for Public Policy Research.

Featured Image Source: Visual Hunt

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Posted by The Indian Economist