GST likely to be passed in monsoon session of Indian Parliament

The Goods and Services Tax (GST) is likely to be passed during the monsoon session of the Parliament which runs till August 12, after having being pending for more than a decade’s time. Near-term positive sentiments could falter if the bill is stalled yet again, delaying its implementation beyond 2017.

The implementation of GST has become long due development in India’s complex tax structure, which is expected to refine the tax-paying process for businesses and investors, making the practice compliant and efficient. According to the World Bank, tax compliance actually become more difficult in 2016 compared to 2015.

Firms face several taxes at each stage of production and distribution that are not always offset by input credits. This amplifies the net tax burden, adding to end costs. Services taxes also fall outside the purview of the VAT. The number of exemptions under the present system is laborious and remains a herculean task for tax payers.

Despite the introduction of the Value-Added Tax (VAT) back in 2005, there are still multiple layers of taxes under the central and state governments. VAT rates also differ between states. The GST is expected to iron out most of these wrinkles, helping to simplify the tax structure, encourage compliance, lower costs, improve efficiency and broaden the tax base, DBS reported.

Moreover, if the GST bill is passed in the upper house of the Parliament this month or by August, a GST Council will formalize the finer details by end-2016, including the official rate(s) and revenue sharing agreement. Implementation is likely to be completed next year.

"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," DBS commented in its recent research report.

Meanwhile, while a single-rate system seems ideal for the economy, it could prove difficult to pass. 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 do not impinge upon growth and incomes.