Moving to a GST regime will be beneficial for the Indian economy on multiple counts, and though its impact on growth will be negative in the short-run, it is expected to be positive in the long-run, says a report.
Hopes are high that the long-standing Goods and Services Tax (GST), which has been pending for more than a decade, will be passed in the ongoing monsoon Parliament session.
“Failure to pass the Bill in the ongoing monsoon session could puncture some of the recent positive sentiment,” DBS said in a research note.
The GST Bill, which intends to convert 29 states into a single market through a new indirect tax regime, was earlier planned to be introduced from April 1 this year, but the deadline was missed as the legislation to roll it out remains in limbo in the Opposition-dominated Rajya Sabha.
According to DBS, GST has growth, inflation and fiscal implications.
Implementation of GST is expected to lead a temporary rise in inflation, which will typically last a year.
The impact on inflation will wear off as these prices enter into the base, softening inflation the year after.
Similarly, on the growth front, 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.
Moving to a GST regime will be beneficial for the economy on multiple counts. While a single-rate system would be ideal, it could prove difficult to pass, the report said.
The government faces a fine-balancing act , as it works to reach a consensus with the state governments and opposition parties, whilst also ensuring higher taxes don’t impinge on growth/ incomes.
The odds are high that the authorities initially adopt a multi-tiered and diluted version of the GST.