Opinion

India never so close to Goods & Services Tax !!

Mahesh Singhi Mahesh Singhi - 3rd August 2016
However, several regional parties such as the JDU and TMC have shown support for the GST on account of state-level considerations.

We believe that the political equation is changing in favour of the GST owing to consensus building on the part of the government and state-level considerations. We expect the GST to become a reality soon. Earlier this week, in a joint meeting the central and state governments already reached a few conclusions though a few points still remain unclear. The government is trying hard to table the GST bill in the upper house of the parliament in the current parliament session which ends on 12 August.

We see the GST as a potential game changing indirect tax reform. Apart from simplifying the current indirect tax structure. GST should help create “One” India by eliminating geographical fragmentation. Political consensus now seems to be changing in favour of GST and we expect it to become a reality soon. While short-term macro-economic implications of GST should be mixed, longer term, implementation should lift growth and enable greater general government fiscal consolidation. From sector perspectives, GST will be generally positive for consumption-related sectors (auto, consumer durables, FMCG etc.). Logistics should benefit from the removal of inefficiencies in interstate taxation and check posts. The services sector, however, should be impacted negatively due to the higher tax burden.

The introduction of the GST should simplify and unify the indirect tax regime in the country, which is currently riddled with complexity owing to multiple state and central taxes, a multitude of exemptions and incomplete input credit across different taxes and between goods and services. We note that currently under the constitution, while the Union government is constrained from levying taxes on goods beyond the point of manufacturing, state governments cannot levy taxes on services. Thus, to simplify and unify the current indirect tax structure, an amendment to the current constitution is needed. The implementation of a unified and simplified GST through constitutional amendment could overhaul the current indirect tax system of India, in our view. GST will also promote the government’s “Make in India” programme by unifying Indian markets. The overall cost of doing business should also decline. We believe this will encourage foreign companies to invest into Indian manufacturing sector. Moreover existing MNCs like Honda, Hyundai, Toyota, Volkswagen will benefit from simple tax structure. The companies which are in middle of setting up facilities in India like Foxconn, Apple and Honeywell will also among major beneficiaries.

We note that political equations and compulsions are difficult to predict. However, based on economic considerations, we expect the GST constitutional amendment bill to pass the Upper House test soon. Once the constitutional amendment is passed in the Upper House, it will need to be ratified by more than 50% of the 29 state assemblies. This will be followed by passing of central GST laws in both the Lower and Upper House and states own GST laws in the respective state assemblies.


Mahesh Singhi
Managing Director - Partner,
Singhi Advisors Pvt. Ltd.


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