GST rollout to curb black money flow, bring down inflation: Panel

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Dec 10, 2015 01:27 IST
According to a panel, Goods and Services Tax (GST) will help curb black money and bring down inflation.

The proposed Goods and Services Tax (GST) will help curb black money and bring down inflation, the panel led by chief economic adviser Arvind Subramanian has said.

The panel, which released a detailed report on Wednesday, also listed several risk factors, including a revenue shortfall and re-emergence of trust deficit between the Centre and the states, on implementing GST.

The government is looking to pass the Constitution amendment bill for the introduction of GST in the ongoing winter session of Parliament. The Bill has been passed by the Lok Sabha, and is pending in Rajya Sabha where the ruling alliance does not have a majority.

The use of electronic invoices will make tax collections more efficient, and reduce the scope for fraud and evasion. “At the Centre and state levels, significant improvements in compliance will be seen because of the IT systems under which matching of supplier and purchase invoices will be electronic and instantaneous. This will improve compliance for direct taxes. Other general compliance will also improve because of dual monitoring by the Centre and states,” the report said.

“The government has placed a great deal of emphasis on curbing black money reflected in the Black Money Bill. These measures can be very significantly complemented by GST, which, if it is extended to as many goods and services as possible (especially alcohol, real estate and precious metals), can be less intrusive, more self-policing, and hence more effective way of reducing corruption,” it added.

Without specifying the actual impact of GST on inflation, the report said: “For India, one broad conclusion is that under a dual rate GST, the aggregate impact on inflation will depend on the revenue neutral rate (RNR) and the standard rate. An RNR in the 15-15.5 % range with a lower rate of 12% and a standard rate of 18% would have negligible inflation impact. A higher RNR with a lower rate of 12% and a standard rate of 22% would have a 0.3-0.7% impact on aggregate inflation. However, under both these scenarios, if food and fuel and light were exempted, and with the Public Distribution System in operation, the price impact on these items of consumption for the poor can be minimal.”

The report, submitted to finance minister Arun Jaitley last week, has recommended a standard GST rate of 17-18% — the rate at which most goods and services will be taxed. It is based on a RNR, at which neither the Centre nor the states will lose any money, of 15 to 15.5%.

The panel also suggested doing away with the 1% additional entry tax on inter-state movement of goods, and the introduction of a three-tier structure, in which certain essential goods will be taxed at 12%, the lowest, while “demerit goods” such as luxury cars, aerated beverages, pan masala and tobacco products at a higher 40%.

However, one risk of setting an RNR that is low is the re-emergence of a trust deficit between the Centre and states as happened in relation to compensation for lost CST (central sales tax) revenues after the global financial crisis,” the report said. The revenue shortfall could be overcome by raising taxes on products such as petroleum, alcohol and tobacco.

“A moderately higher fiscal deficit due to a low GST will benefit consumers, especially poorer ones,” the report added.

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