Every time there's some positive announcement on the Goods & Services Tax, the stock market rises in anticipation. ET navigates through the ABC of GST, and tries to make sense of Dalal Street's reactions and what is in store for the economy if the tax becomes a reality.
1. What is GST?
Simply put, GST is a centralised tax. Currently, companies and businesses pay lot of indirect taxes such as VAT, service tax, sales tax, entertainment tax, octroi and luxury tax. Once GST is implemented, all these taxes would cease to exist. There would be only one tax, that too at the national level, monitored by the central government. GST is also different in the way it is levied — at the final point of consumption and not at the manufacturing stage. At present, separate tax rates are applied to goods and services. Under GST, there would be only one tax rate for both goods and services. So, whether you are in Mumbai or Darbhanga, you will have to pay the same tax rate.
2. Why are the stock markets excited about GST?
The markets are betting that GST would provide the much needed push to the economy. At a micro level, sectors such as retail and manufacturing sectors such as automobiles would see an increase in their margins. The benefits of GST would be most evident on the manufacturing sector. However, what markets may be ignoring is the short term impact of GST. According to the experience of countries such as Australia and Malaysia, GST triggers inflation in the first couple of years. Also, if the government doesn't scrap dual GST (1% being levied by states), the benefits of GST would reduce significantly.
3. What are the economic benefits from a GST Rollout?
The biggest benefit of GST is that it would bring in more revenue to the government. Currently, there are a lot of slippages in taxes. With just one authority managing the tax, collections would go up. Also, since the tax would be charged on a consumption basis and not on manufacturing, poor states of the country would benefit. Under GST, irrespective of where the goods are manufactured, tax would be charged at the point of consumption, which essentially means that even poor states would see more funds being generated which could be used for their development.