Further steps on GST to boost consumption and push growth

SMERA Ratings believes that the additional steps taken by the GST Council on November 10 will go a long way in boosting private consumption and strengthening the growth prospects of the country in the near to medium term. The reduction of GST rates on 215 items which include many manufactured by small and medium enterprises would benefit them and improve their competitiveness. The additional steps taken to simplify the GST compliance process in addition to the steps announced earlier in October would also be welcomed by the MSME sector.

Private consumption accounts for around 55% of India’s GDP. There has been a weakness in the growth of private consumption from the fourth quarter of the previous fiscal which has continued well into the first two quarters of 2017-18. While there are some signs of a consumption pick up from the current quarter, these can get a strong boost from the reduction in GST rates on 215 products as shown in the table below.

Existing GST

Revised GST

No. of items

Industries to benefit

28%

18%

178

Food, FMCG, Electrical equipment

28%

12%

2

Machinery and equipment, Vehicles

18%

12%

13

Food, Pharmaceutical, Machinery and equipment

18%

5%

6

Food and chemicals

12%

5%

8

Food, leather, textile

5%

0%

8

Food


Many of them are part of the daily use of people and include items such as washing powder, shampoos, furniture, plywood, mattresses, chocolates and some other sweet items. The tax reduction may not only reduce the prices of these items and boost demand to some extent, it is also expected to benefit the smaller manufacturers and distributors of these products by improving their margins. SMERA estimates that the food processing, furniture and the electrical equipment industry will be the primary beneficiaries of this tax rationalisation. Since they account for around 15% of industrial production, it can have a positive rub-off on industrial growth too. It is also noteworthy that the GST rates for restaurants have been rationalized to a single rate of 5% (except for those in 5 star hotels) which should reduce the cost of eating out and also be positive for the smaller eateries which are part of the MSME ecosystem.

Further simplification of GST norms for small traders and manufacturers have also been undertaken. The composite scheme which was initially valid for turnover upto Rs. 75 lakh was extended to Rs. 100 lakh in October and is now applicable for turnover upto Rs. 150 lakh. The government proposes to increase the limit again under this scheme to Rs. 200 lakhs through an amendment of the GST laws. The composite scheme tax rate has further been made uniform at 1% with payment of the taxes and the filing of the taxes required on a quarterly basis. Clearly, the compliance costs for small entrepreneurs and enterprises would reduce significantly, leading to an increase in the taxpayers’ base and improving compliance.

SMERA continues to believe that the implementation of the GST is structurally positive for India in the medium to long term. India compares unfavourably with its peers in its tax coverage with central tax to GDP ratio at 11.2% in 2016-17. Globally, the implementation of GST has been seen to improve tax coverage with SMERA's analysis highlighting that the average increase in the tax to GDP ratio has been 2% post implementation of GST. India can also be expected to record a significant improvement in the tax to GDP ratio in the next 1-2 years with the increase in tax base and higher tax base; the additional steps being taken by the government to streamline the GST framework would only serve to take India closer to that objective.
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