Cross-country evidence suggests that the introduction of GST has no correlation with GDP growth. Although the introduction of a single GST limits inefficiencies created by a heterogeneous taxation system, there is little evidence that it helps boost economic activity. However, the introduction of GST helps in reducing inflation by removing the problem of dual taxation and thereby reducing the cost of doing business. It also helps in boosting the tax:GDP ratio, provided the GST is introduced at a high enough rate i.e., higher than the revenue neutral rate (RNR), which in India seems to around 18%.
Whilst the introduction of GST will undoubtedly remove inefficiencies (such as the problem of double taxation) and simplify the existing indirect tax structure, its impact on economic growth is ambiguous. At the RNR of 18%, the
Government’s revenue will remain unaffected and hence the Government cannot increase expenditure to stimulate growth; however, at a GST of 25%, India’s tax:GDP ratio (which at 11% is significantly lower than other emerging Asian economies’ >20%) will increase by as much by 1-2% points. If the Government spends these increased revenues of around $20-40bn on capex, then GDP growth will be positively impacted, especially as the fiscal multiplier (around 2.45x for India) comes into play.
A further complication is the mooted 1% inter-state tax, which is supposed to be given to producing states; if levied, this can significantly reduce the benefits of moving to a harmonised GST. Note further that given the sheer amount of legislative and logistical work that remains to be done, it is highly unlikely that GST will be implemented before April 2017.