Introduction of the GST system is expected to have a macro economic impact and will set a new course for cooperative federalism by strengthening Centre-state partnership, the RBI said in a report released here on Friday.

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 successful implementation of GST will result in additional revenue through simpler and easier tax administration, supported by robust and user-friendly IT (information technology) systems," the study said.

It said the GST is expected to reduce administrative costs for collection of tax revenue and improve revenue efficiency while uniformity in tax rates and procedures will lead to economy in compliance cost.

The GST regime will also increase the shareable pool of resources, resulting in transfer of large funds to the states for developmental works.

"Such an outcome will ensure debt sustainability of states in the long term. In fact, the GST is likely to set a new course for cooperative federalism in India by strengthening Centre-state partnership," the study said.

According to the RBI study, most of the central cesses will be subsumed into the GST and in turn increase the divisible pool of resources which is to the advantage of states.

"Introduction of a new cess on luxury and demerit goods may be contrary to the GST spirit but the proceeds will be used to compensate the states; thus, the overall impact of GST will be beneficial," the study said.

The study said that from the point of view of implementation, it could be argued that the GST is imposed on consumption while cess, which is typically applied at the stage of manufacturing, may be difficult to administer and could also lead to cascading effects.

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.

 13 May 2017, 10:09 AM