Restructuring GST for Greater Consumer Spending Increase

The current economic landscape in India is marked by uncertainty due to ongoing developments in tariff policies. According to experts, the next year could be a bit choppy if tariff restrictions remain unchanged, forcing the economy to endure a full year's cycle in the new environment.

However, there are glimmers of hope on the horizon. The Goods and Services Tax (GST) reforms, slated for September, could potentially bring about significant changes. The GST structure is expected to be streamlined with two main rates: 18% and 5%. This reform could lead to substantial savings on every vehicle purchased, as the GST rate might be reduced from 28% to 18%. Moreover, several goods and services currently in the 28% bracket will move to 18%, and those in the 12% bracket will move to 5%.

The GST Council's decision, to be announced in September, just before the festival season, could stimulate spending during Dussehra and Diwali, a period when Indian households tend to spend the most. Lower prices for consumer goods could also lead to a secondary channel of spending, cumulatively taken across all products.

The lower cost of financing, which has been substantially reduced since February, could further prop up the overall demand for vehicles and potentially housing. The improved cost efficiency for various consumer goods, including automobiles and housing, due to the lower GST rates on inputs, is another positive factor.

The GST, one of the biggest success stories in India's economic history, has consolidated various taxes, making the tax system more efficient and less burdensome for businesses.

In addition to these reforms, the Indian government is expected to release ₹1,600 crore in pending GST refunds before Diwali, providing a much-needed boost to businesses. The steady growth in the nominal GDP is necessary as collections will be a volumes game.

The economy is expected to be on a firm upward path in the medium term, thanks in part to the windfall gain on the non-tax revenue side through the RBI dividend. However, it's crucial for the nominal GDP growth to exceed 10% to offset the impact of low inflation, which has truncated the nominal GDP growth to well below 10%.

As for the impact on the economy in the very short run, there could be good times for households. Sin goods, such as tobacco and luxury items, could potentially move to a 40% GST rate, which could affect consumer spending in these sectors.

It's important to note that the new GST distribution, to be announced in September, involves government institutions and households, with funds being allocated primarily between the government and private households. However, explicit details on the exact persons or institutions involved and precise distribution mechanisms were not found in the available search results.

The author of this article is the Chief Economist of Bank of Baroda and the author of 'Corporate Quirks: The Darker Side of the Sun'. Views expressed are personal.