GST 2.0: Analyzing the Macroeconomic Impact of Rate Rationalisation
UPSC Relevance
Prelims: Indian Economy (Fiscal Policy - GST, Fiscal Deficit; Monetary Policy - RBI; National Income - Nominal vs Real GDP, GDP Deflator).
Mains:
General Studies Paper 3 (Economy): Government Budgeting; Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Inflation. This article provides a deep dive into the macroeconomic implications of a major fiscal policy change.
Key Highlights from the News
GST 2.0, the new tax structure, may lead to a significant revenue reduction for the government in the short term, but it is likely to aid economic growth in the long run.
Reducing tax rates will increase disposable incomes of consumers, thereby boosting the consumption of goods and services.
However, this revenue loss is likely to adversely affect the government's fiscal deficit targets.
Lower than anticipated nominal GDP growth in the budget and a reduction in direct tax revenue further intensify this concern.
A drawback of the new structure is that the cascading effect of taxes is not entirely eliminated, as products with zero percent tax do not receive Input Tax Credit (ITC).
The article concludes that demand stimulation through tax concessions can only be done occasionally, and the country's long-term growth will depend on saving and investment rates.
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