| | | India:
The landmark Goods and Services Tax (GST) Constitutional Amendment Bill was passed in the Rajya Sabha today. This paves the way for a simpler tax regime and unified common market.
Macroeconomic impact favourable from a long term perspective. In the short term inflationary pressure expected to rise. RBI may look through the transitory inflation impact amid significant structural economic boost.
Pending issues such as the revenue neutral rate, IT infrastructure set up and details regarding exempt items are still to be ironed out. We expect GST to be applicable from April 1st 2017.
GST to be a landmark improvement over existing taxation regime
In a historic development the Rajya Sabha has voted in favour of the unified Goods and Services Tax (GST) Constitutional Amendment Bill. The implementation of the GST will make India one unified common market, making it a simpler tax regime. Under the new tax regime, input tax credit would be available at each stage, which will help eliminate the issue of tax cascading. Additionally, GST offers offset across taxes and it is a 'destination-based tax'.
Macroeconomic impact favourable from long term perspective
Economic growth: From a medium term perspective, the improvement in consumers' disposable income amid lower taxes is likely to encourage private consumption. Introduction of input tax credits for certain capital goods is expected to encourage investment via reduced cost. Manufacturing competitiveness improves on efficiency gains as concerns relating to cascading of taxes, inter-state taxes, high logistics costs and fragmented markets are addressed. Fiscal improvement: The less complex GST framework would make tax administration more efficient, leaving lesser scope for leakages. Further, since the GST offers input tax credit offset, firms are likely to be more particular about invoicing (to claim the credit) and it's likely to encourage voluntary compliance. As a result, the revenue impact for the Government would be positive from a medium term perspective. Inflation: The introduction of GST is likely to result in asymmetric pricing behaviour by firms. Services inflation is likely to rise because of pass through of tax increases but manufacturing prices will fall less than the fall in manufacturing taxes (on account of incomplete pass through). Consequently, on balance, headline inflation is likely to rise by around 40-60 bps on implementation of GST. Though the GST is likely to push up the inflation in the near term, it is positive from the medium term perspective. However many pending issues stand to be resolved
The Goods and Services Tax (GST) Constitutional Amendment Bill, after being passed in the Rajya Sabha today, will be sent to the Lok Sabha for approval. Post its passage in both the Houses, at least 50% of the state assemblies will need to ratify the Bill (by 2/3rd majority), which is unlikely to be a challenge. After these procedures are complete, the Parliament is likely to take up the final Bill in the Winter Session later this year. The other issues that need to be addressed include the finalization of the revenue neutral GST rate and adequate IT infrastructure to record registrations, payments and tax-returns. Several other features of the GST also need to be finalised (for e.g. the list of exempt goods and services). Amid these pending issues, we expect GST to be applicable from April 1st 2017.
Please refer to the attached document for a detailed report. | Regards,
ICICI Bank
Contact:
Samir Tripathi
(+91-22) 2653-1414 (extn: 7233)
samir.tripathi @icicibank.com
Niharika Tripathi
(+91-22) 2653-1414 (extn: 6943)
niharika.tripathi @icicibank.com
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CA. Rajesh Desai
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