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What the Goods and Services Tax really means for the economy

What the Goods and Services Tax really means for the economy

By Prachi Srivastava

From demonetisation to the Goods and Services Tax (GST), the Modi government has left no stone unturned to surprise the public. While demonetisation has caused the companies involved with consumer durables and the automobile sector to experienced a dip in their sales and profits, the GST is threatening to follow suit. Post demonetisation, the GDP growth reduced to 6.75% in the Fiscal Year of 2017 (FY17), and the RBI projected the real GDP growth to increase to 7.4% in the Fiscal Year of 2018. However, the rollout of the GST can further subdue the GDP growth as the GST will have a short-term impact on spending, which could potentially hinder the GDP growth.

Adverse effects of the GST

The revolutionary Goods and Services Tax claims to be a unified and uniform tax structure which will be effective from the 1st of July, 2017. The bill has been rolled out in order to increase the tax revenue and decrease tax evasion. However, the bill is rather ambiguous. The consumer durables and the automobile sector may face a dip in sales in the months of July and August. With respect to consumer durables, the sales for TVs, refrigerators, and Air Conditioners are expected to dip, due to a 4-5 percent increase in their price caused by the bill.

The plunge in sales

According to the Consumer Electronics and Appliances Manufacturers Association (CEAMA), the decline in sales will be offset with the commencement of the festive season this year, which starts with Onam in August. CM Singh, the COO of Videocon, stated that with most of the consumer appliances placed under the 28 per cent tax slab, the tax incidence on consumer durable companies would go up and the industry would likely pass this on to the consumers. Since the maximum burden is expected to fall on the consumers, a decrease in their expenditure can be expected. A reduction in the inventories of industries can also be anticipated in the near future. Therefore, the sales will be negatively affected in the short run. However, it always takes time for firms to settle to the new tax regime. Since this is a structured tax system, growth is expected to be propelled in the long run.

 Is the GST as beneficial as it is painted out to be?

According to the Dun and Bradstreet report (D&B), GDP figures may not improve. The report mentions that the transition to the GST regime will not be smooth and may, therefore, affect the GDP numbers. Due to demonetisation, the GDP has already fallen and the GST might just pull these numbers down even further during the short run. The report also said, “Weak investment activity as reflected in the subdued capital goods and infrastructure/construction sector output growth is likely to restrain growth.” According to D&B, the economic growth as measured by the Gross Value Added (GVA) method, is likely to grow by 6.6% for the fourth quarter of 2016-17,  from the same period a year ago.

Though the GST is revolutionary in itself and is going to be implemented after a long wait, certain precautionary measures must be taken, and steps to boost consumption via fiscal spending (Government spending) must also be taken. Towards this goal, investments must be encouraged.

Featured Image Source: TurboTax

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