Thursday, August 4, 2016

My two cents on GST

"It will never rain roses: when we want to have more roses we must plant more trees."
George Eliot (British, 1819-1880)
Word for the day
Inculcate (v)
To implant by repeated statement or admonition; teach persistently and earnestly.
Malice towards none
Who was Geeta Zutshi?
Please answer without googling.
First random thought this morning
It is now confirmed that lower crude prices are hitting a section of Indian economy very hard. Remittances from gulf have fallen marginally last year. This year could see the worse in terms of both employment & remittances.
A lot of businesses rely upon activities of the Indian employed in gulf countries, especially travel related businesses and financial services firms. These businesses are already suffering. The pain may rise in coming months. Workers who have been supporting savings, consumption and investment back home may return and sit idle for some time.
Have you heard a plan from the government?

My two cents on GST

The wider debate on GST is now limited to two points - (1) whether it will be implemented from April 2017 or from a later date; and (2) whether it will be inflationary.
From investors' perspective the single point of interest is to find the potential gainers and losers from the indirect tax regime transformation. The traders want to know what can give a jump of 10%+ in today's trade.
Frankly speaking, I have no ready answer to any of the questions. Moreover I do not believe most of the answers provided by various experts and currently available in the public domain.
However, what the five things I can say with fair degree of certainty at this point in time are as follows:
(a)   GST is a progressive reform and will benefit the economy as a whole. It is possible that due to regional political interest groups, in the initial years some restrictions are introduced in the legislation that prevent creation of a truly national market.
       Nonetheless, it will happen as the benefits become quantifiable over next decade or so. We have been living without GST for seven decades. One more with partial implementation is definitely not a matter of life and death.
(b)   One of the primary objective of GST is to improve tax compliance. This is hugely disruptive to the ways a large number of businessmen in the country are used to function.
       Thousands of MSME units are viable just because of tax evasion opportunities under the current regime. These opportunities may not be available under GST regime. Hence, the sustainability of these units is under thick clouds.
       Moreover, there is a full army of professionals which helps these businesses evade tax. These also risk losing their jobs. A large number of revenue department personnel who thrive on bribes, and agents responsible for collecting octroi and entry tax will also suffer.
       Unemployment, losses and shut down of businesses due to financial unviability, are inevitable consequences that will impact urban consumption in the short term. The positive is that we may see many polluting factories operating in neighborhood getting closed.
(c)    Many businesses have made huge investment in tax havens (backward areas) to benefit from tax arbitrage at the expense of business rationale. This investment risks going under water as this arbitrage vanishes in due course.
(d)   Productivity gains shall be seen in most large businesses as logistic costs improve, and compliance becomes easier. For smaller local businesses though benefits are not so direct. These may mostly benefit from the overall pick up in economic growth.
(e)    A household consumer may see rise in the cost of living.

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