GST: A long road ahead, #DBS
Seen as a barometer of India’s reform process, the bill on Goods and Services Tax related constitutional amendments received unanimous support from the upper house of parliament on August 3, 2016.
This indirect tax reform has been waiting in the wings for over a decade. This is likely to provide temporary boost to the domestic markets, with this vote was largely priced-in in the past month.
While this approval was crucial, it marks the first of a long road ahead towards implementation, says Development Bank of Singapore (DBS).
Next up, will be the need to pass the state and central GST bills in the winter parliament session which is usually in 4Q.
More than half of the state assembles will also need to ratify the bill.
Thereafter, the apex body i.e. GST Council will be formed, which will formalise the important aspects of the structure, including the exact rate, revenue sharing agreement, revenue compensation, dispute mechanism etc.
Being fairly contentious issues, much deliberations will be required at this stage.
Deadline challenge
Odds are that the April 2017 implementation deadline will be missed, with 2H17 looking more feasible. Developments here will be watched closely especially given the busy state election calendar in 2017.
The move to a GST regime will be beneficial for the economy on multiple counts, even though there are likely to be growth, inflation and fiscal implications.
Price impact will be 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.
The GST impact on growth will likely be negative in the short-run but positive longer-out given the benefits of a unified taxation regime. A study commissioned by the Thirteenth Finance Commission pegged the long-term boost to GDP growth at 0.9-1.7%. “Our estimates are at the lower end of that range,” said the Singapore bank.
Both the single rate and three-tier approach outlined by the GST panel are meant to be revenue-neutral.
However in practical terms, there is bound to be some buoyancy in fiscal collections for state and central governments.
The panel’s proposed rate is a combined rate, with the GST council to determine how this rate will be divided.
As it stands, the central government’s share in the revenue poll will increase as compared to the states, but the actual revenue losses will hinge on the exact structure that will put into place.
State governments will also be compensated for revenue losses in the first five years. These details are likely to be outlined in the FY17/18 budget due to February next year.
“In all, introduction of GST is like a dose of bitter medicine, a necessary step, even if negative in the short-run,” said DBS in commentary on August 4, 2016. fii-news.com
