GST: Encouraging progress

Progress on the Goods and Services Tax reform late last week was encouraging, says the Development Bank of Singapore in its daily report on Nov 7, 2016.

The GST Council finalized a tiered structure: 5% on mass consumption/essential items, 12% and 18% as standard rates and 28%. An additional cess will be levied on luxury and sin items to compensate states for potential revenues losses.

Granular details on the classification of the exact goods is yet to be finalized, along with a final say on the rate for services. Indications that most services will be pegged at 18%, higher than at present.

The inflationary impact has however been softened by exempting half of the CPI basket, along with a likely reduction in taxes on white goods/ durables. Potential impact would likely be half of our earlier estimated 40-70bp range. Either way, the difference between old and new tax rates will dictate the extent to push up in inflation.

Meanwhile spending on items for which taxes is likely to rise, will increase ahead of the implementation, providing short-term boost to growth before tapering off a quarter or two and stabilize thereafter.

Decision on the division of audit and assessment of taxpayers however was inconclusive. The GST council is due to reconvene on 24-25 Nov, after an informal meeting on Nov 20.

Next up, draft legislations need to be completed by mid-Nov. The CGST (central GST) and IGST (integrated GST) bills will be tabled in the winter parliament session that runs from 16 Nov to mid-Dec. State GST bills will be passed by the respective states.

Thereafter setting up the ecosystem including the operational framework, documentation, accounting, infrastructural, IT/software and educating users will take priority.

Time-bound and speedy decisions like the ones demonstrated last week increase the odds of a timely implementation next year. April 2017 has been flagged as the deadline, with a push to September also unlikely to trigger much disappointment, provided the rollout is efficient and with minimal disruption to the stakeholders.

Move to a GST regime aims to make the industry more competitive and cost-effective through lower logistics and procurement costs. The inflationary impact is also likely to be more subdued than feared given the exemption/ low rate baskets.

Implication will become clearer as more details emerge in the months ahead. fii-news.com