GST being hailed as a 'breakthrough' but market still cautious about its 'rolling out'

Singapore/New York: The passage of the GST bill has been hailed as a "breakthrough" in a long battle to unify India's economy to attract FDI and create jobs but implementation could be challenging and time-consuming as consensus on some of the finer details might not be easy.

The Development Bank of Singapore (DBS) on Thursday said the Goods and Services Tax (GST) bill passed overwhelmingly by the Parliament last night is a "positive development" likely to provide temporary boost to the domestic markets.

 GST being hailed as a breakthrough but market still cautious about its rolling out

Finance Minister Arun Jaitley. PTI.

"It is a positive development. (But) April 2017 deadline (to implement the GST) looks quite challenging——actual mechanism has not been thrashed out yet, that would be next contentious issues," said Radhika Rao, vice president and economist at DBS.

"The full roll out (of the GST) will be second half of next fiscal year 2017-18," estimated Rao, the bank's lead in monitoring the Indian economy.

"It is not going to be easy to get some of the consensus on some of the finer details. It could be a time-consuming process.

"These developments will be watched closely especially given the busy state election calendar in 2017," she wrote in the bank's daily market report.

Price impact will be the highest if a single GST rate is adopted, but it is more likely that a tiered system would prevail, maintaining food and essentials at low rates whilst sin taxes form the highest bracket, according to DBS.

Anticipating an effort to balance in sharing the GST revenue between the central and state governments, DBS expects details likely to be outlined in the fiscal 2017-18 budget due in February.

Leading US dailies said the passage of the bill was an "important step" in Prime Minister Narendra Modi's campaign to modernise India's economy and over the long term, will attract foreign investment, boost manufacturing and exports and create jobs.

The New York Times, in its report on the passage of the GST bill in the Upper House of Parliament, said it is the "most important economic measure since India opened its markets in 1991".

"Potentially one of the most dynamic economies in the developing world, India is hampered by a bewildering array of state-by-state tax codes that discourage doing business across state borders," NYT reported

"The Goods and Services Tax is widely viewed as a breakthrough that will allow the authorities to confront the problem, eventually creating a more unified economy that will allow businesses to expand nationwide far more easily," it said.

It cited senior associate in the South Asia programme at the Carnegie Endowment for International Peace Milan Vaishnav as saying that the GST was long overdue and is "hugely consequential for the ease of doing business, and for demonstrating to the outside world that India is dragging its economy into the 21st century".

The report added that while the GST reform is likely to lead to an inflationary bump, over the long term, it is "expected to attract foreign investment and bring down the cost of capital goods, lift manufacturing and exports, increase tax collections and — perhaps most important, in a country where one million young people enter the work force each month — create jobs."

A report in the Wall Street Journal said "after more than a year of gridlock, the upper house of India's parliament approved a contentious overhaul of the country's convoluted tax system, an important step in Prime Minister Narendra Modi's campaign to modernize Asia's No 3 economy".

"Shifting to a GST would help ease the burdens of double taxation and other distortions caused by the current system. The move, which India's government first proposed a decade ago, would also lower barriers to interstate commerce. Some have compared it to the abolition of customs duties within the European Union," it added.

It, however, said that the benefit to India's economy as a whole may not be immediate and the GST could add to inflation at a time when price growth is already picking up.

"Services will likely be taxed at a higher rate than they are currently, as will clothing and some other products," it said.

The US-India Business Council (USIBC) termed the passage of GST bill by the Indian Parliament as a "game-changer" that will boost economic growth by streamlining domestic supply chains and removing the compliance burden of contradictory state tax regimes.

While congratulating India, the body said this is a significant milestone in the country's ongoing efforts to improve its ranking in the World Bank's ease of doing business index.

"A simplified tax structure can usher in greater compliance, increase the number of tax payers and therefore, widen the tax base resulting in higher tax revenue for the government," USIBC president Mukesh Aghi said.

"GST is also likely to make goods cheaper for consumers, increase competitiveness of Indian exports in international markets and boost India's GDP growth by 2 percent. This far-reaching reform places India at the cross-roads of an incredible economic opportunity," he added.

Updated Date: Aug 04, 2016 16:06:48 IST

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