Taxing times: GST hurt Malaysia, Australia. Will India's euphoria last?
The Rajya Sabha passed the Goods and Services Tax with 203 votes in favour and none against on 3 August. It was a historic occasion, not least because the law had been debated in the country for over a decade.
The 203-0 vote suggests GST has been principally accepted by all political parties, as Congress leader P Chidambaram noted in his speech in the Rajya Sabha.
If Finance Minister Arun Jaitley's understanding of GST is to be believed, the central tax can increase India's GDP by 1-2%.
Apart from India, at least 160 countries implemented GST. In recent years, Singapore, Malaysia and Australia have introduced, but only to realise that it's no magic potion to bring economic prosperity.
Let us take the example of Malaysia, which implemented GST in 2015. The Southeast Asian nation is similar to India in that its tax base is narrow, that's it has few taxpayers. India's current tax base is a mere 3.5 crore, even though 10 crore individuals and business entities are registered with the Income Tax department.
According to Malaysia's Department of Statistics, less than 30 lakh people, or just 22% of the total labour force, paid income tax in 2013. As far businesses, only 25% of the registered companies paid taxes that year.
Although Malaysia started with one of the lowest GST rates in the world at 6%, consumer prices rose 4.2% year-on-year in February 2016 as compared to 3.5% in January. It was the highest inflation rate since December 2008, spurred by cost rises across categories. High inflation sucked money out of the economy, contracting consumption demand. Retail sales fell 4.4% over the first quarter of 2016.
The situation got so bad that in April, people took to the streets demanding rollback of GST.
By June 2016, inflation dropped to 1.6% but the country is still staring at slower economic growth due to reduced consumer spending and a fall in exports.
In Australia, the debate around GST started in 1993, and the tax was eventually introduced in 2000. It raised inflation by 3% within an year, forcing the government to give various concessions to different groups and companies to offset the damage. This only further distorted the economy.
Today, Australia is debating whether to increase the GST rate from 10% to 15%. But analysts and activists are worried about its impact on low income groups. According to an analysis by the National Centre for Social and Economic Modelling, the current 10% GST rate consumes 13.4% of the disposable income of households in the bottom fifth income-wise. But if the GST rate is increased to 15%, it would take more than 20% of the income of such families.
Coming back to India, it's expected that the NDA regime will at least want to keep the GST rate at 18%. This won't be the highest rate of GST in the world, but it'll certainly push up the cost of services in the country.
The services account for 57% of India's GDP. The current taxes on services come to a total of 14.5%. A GST rate of 18% will, thus, only hike the cost of services - flight, train and movie tickets; credit and debit card transactions; telephone calls; eating in air conditioned restaurants.
The Reserve Bank of India has been forced to keep the rate of interest high to control inflation, which is above 5% currently. In such a scenario, it would be interesting to see how Jaitley deals with the new economic set-up that will be ushered in by GST.
If the passing of the GST bill was a sort of climax of the NDA government's effort to reform the country's tax regime, it's quite possible that the impact of the implementation of GST will be an anti-climax to the euphoria India has witnessed since Wednesday evening.