The goods and services tax (GST) can boost India's GDP growth by up to 4.2 per cent – double the previous estimate – as lower taxes on manufactured goods will bump up output and make products cheaper, according to the US Fed Reserve.
GST could reduce inefficiencies in the production process while eliminating the current compounding effect of different central and state levies.
Termed the biggest tax reform since Independence, GST will unify at least 10 indirect taxes into one to be collected at state and central levels.
In the International Finance Discussion Paper (IFDP), the US Fed researchers said GST is an inclusive policy that is also expected to bring down overall domestic and international trade barriers.
GST is expected to raise overall Indian welfare and is projected to be an inclusive policy in that it would be welfare improving for all Indian states.
The Fed research note stated that assuming the aggregate weighted GST rate is 16 per cent, there would be positive impact on real GDP of 4.2 per cent.
The model suggests that GST would lead to real GDP gains of 4.2 per cent under the baseline assumptions, driven by a surge in manufacturing output.
GST would raise overall welfare by 5.3 per cent in India.
Under the existing structure, at each point of sale, additional taxes are applied to the after-tax value of each goods and services.
The main purpose for GST is to eliminate this compounding effect by fixing the final tax rate, where goods will fall into one of the four rate categories of 5, 12, 18, and 28 per cent.
The unified structure is currently expected to be rolled out in July.
GST's impact on GDP growth as estimated by Fed economists is much higher than the 1-2 per cent as expected by the Indian government.
IMF, World Bank Views on GST- The International Monetary Fund (IMF) had earlier this year said GST could help raise India's medium-term GDP growth to over 8 per cent.
- This could create a single national market for enhancing efficiency of movement of goods and services.
- Even the World Bank has said a smooth implementation of GST could prove to be a significant push to economic activity as growth could pick up to 7.2 per cent in 2017-18.
- It will move further to 7.5 per cent in 2018-19.
