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(MENAFN- The Arabian Post) By Anjan Roy

The GST reforms introduced by the GST council at its September 4 meeting is a mega budget for the entire country. It will be the determining factor for the budgets of the central government as well as those of the states.

The goods and services tax, shorter form GST, had consolidated all the indirect taxes in an umbrella tax and now comprises a major segment of the total revenues of both centre and states.

The rationale for the wide-ranging ranges in the rates and attempt at reducing the slabs of the GST structure. Is it fulfills a promise of consolidation of slabs of tax rates.

This is part of the overall reforms of taxation that was undertaken with the introduction of the GST in 2017. At that time the country was divided into numerous tax jurisdictions of the centre and the states, which were consolidated into a uniform tax code -the GST.

At the time of its introduction, it was promised to have only two tax slabs. However, practical considerations allowed some four slabs, with a stated objective of arriving at a two slab structure in the future. The present exercise, virtually introduces a two-slab structure: 5%, 12%, 18% and an outlier 40% (called a sin tax).

On average, GST revenues are 44% of the total revenues of states and the centre. Taking a more focussed view, GST would account for even larger segment of the revenues of states. The recasting of rates could be expected to hit the state finances more than the centre's.

Since the rates for GST could be fixed by the GST council and neither the centre or the states could unilaterally change these, the announcements made provide an iron-clad frame within which the budgets would have to be provided. With the latest announcement regarding the reformed GST, it will provide the basic frame for budgets.

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The announcement of GST slab rationalisation -commonly referred to as GST 2.0- sounded very similar to former budgets. The budget announcements of tax adjustments used to be reflected in the prices of ordinary consumer goods going up or down. Cigarette prices would be up and bidis down; ACs up and diesel down and so on.

What is the logic of introducing these changes now? As such, the exercises were for slab reduction and other reforms all along. But the urgency of implementing these changes has a contemporary logic.

Hopefully, the slab restructuring and the lowering of tax rates of a wide number of articles is expected to boost consumption. This is particularly relevant as Indian exports to one of its major destinations are feared to hit serious roadblocks.

The Trump tariffs, combined incidence of which could be as high as 50%, might drive Indian products out of the US markets. For many major export items, such as, garments and textile items, are already feeling the crunch. Employment in these segments are falling drastically, according to some reports.

The tax cuts should primarily help in raising domestic demand for goods and thus compensate the loss of markets overseas. It is the same logic followed by many countries earlier, like the US itself in the time of Reagan presidency. American tax cuts had worked wonders for its economy then.

So, the finance minister, Nirmala Sitharaman, hopes that the tax cuts on a variety of products from motor cars to milk products should boost domestic demand. Prime Minister has also been harping on the same logic that the government was leaving more money with the people with its lower tax rates to spend on consumption items.

With higher consumption at home, it should have its own virtuous cycle. More consumption should bring forth larger investments by producers to meet higher demand and that should result in higher employment and again an upward cycle of growth and development.

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Now the cynics might chip in. Taking into account the behaviour of Indian private sector and entrepreneurs, they say in the past higher demand did not necessarily translate into larger investment, employment and growth. Even in the recent years, private investments have been lagging behind and it is only public investment by government in large infrastructure projects which had buoyed up the economy.

In the face of rising demand if supplies do not match up, the inevitable result could be inflation. Higher inflation following greater consumption thrust could become a self-fulfilling vicious cycle and upset the overall balance. That is surely one of the possibilities, including its reverse.

In fact, there are reasons to believe that a deep cut in taxes on day to day consumables would really provide a leg up to the economy and private investment spur should result. More so in the current situation when the investments opportunities have been opened up and a bevy of foreign companies are all set to invest in the Indian market. Witness the recent spurt in investments from foreign companies in mobile phones to motor cars.

These global players are creating a new class of manufactures in the country of world standards and these are finding their own niche markets in the country as well as globally. They are also generating high income employment as well.

The present round of reforms in public finance structure should be viewed from this larger perspective than only tax reforms. These have also to be placed in the background of current geo-economics and their implications for the country.

From this point of view the changes introduced are well-timed and could be seminal forces for growth. Let us wait with our fingers crossed. (IPA Service )

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