According to the Reserve Bank of India (RBI) report entitled 'State Finances: A Study of Budgets of 2016-17', the Goods and Services Tax (GST) introduction is expected to have significant macro economic implications in terms of growth, inflation, export competitiveness and fiscal balance in the years ahead.
The report clarifies that besides giving a major boost to tax revenue, the larger impact on the fiscal health would be from reduction in the administrative compliance cost. GST is likely to be supportive of fiscal consolidation without compromising capital expenditure.
Under the prevailing tax structure in India, investment is discouraged through the application of excise duties and VAT on capital goods, for which no set off or input tax credit is provided. For example, input tax credits are not allowed for union excise duties on capital equipment acquired for non-manufacturing sectors; similarly, no credit is allowed for the state VAT on capital goods acquired by the services sector, report added.
The Subramanian Committee (2015) assumed an elasticity of investment demand with respect to price at (-) 0.5 and an incremental capital output ratio of 4 and inferred that GST could increase investment by 2 percent which could propel growth by an incremental 0.5 percent although an earlier study had projected GDP growth to increase by 1.7 percent (NCAER, 2009). A recent study, however, posits a much higher incremental growth impact of 3.1 - 4.2 percent based on alternative scenarios of the likely aggregated GST rate due to surge in manufacturing activity and trade (Leemput and Wiencek, 2017).
The implementation of the GST should also boost domestic business confidence, including among foreign investors by assuring a stable and transparent tax system, free of cascades and distortions, it added.On the status of state's finances, the study said that increasing reliance on market borrowing, along with enabling conditions for additional borrowing by states, poses challenges for the sustainability of state finances as higher state borrowings raise yields and cost of borrowing.
Due to prevailing uncertainty about the revenue outcome from the GST implementation, the outlook for revenue receipts of states could turn uncertain, the study said.
"There is, however, the cushion of compensation by the Centre for any loss of revenue for initial five years. In this context, the GST remains the best bet for states in clawing back to the path of fiscal consolidation over the medium term," the study said.