Moody's: Upper house approval of India's GST bill is credit positive

Moody's Investors Service say that the Indian upper house's approval of the country's goods and services tax (GST) bill paves the way for its implementation, a credit positive for the country's sovereign and non-financial corporates.

The GST will have a positive impact on growth and tax revenues over the medium term, supporting the sovereign's credit profile.

Specifically, it will remove a key hurdle to the smooth movement of goods and services, and by reducing the tax administration costs of the government and corporate sector, it will improve compliance and raise tax receipts.

However, its implications over the short term will be limited, given that effective implementation will take some time, and the recommended GST rates are intended to be revenue neutral.

Moody's conclusions were contained in its just-released report, "India Credit, Upper House Passage Paves Way for GST Bill Implementation, a Credit Positive".

On August 3, India's (Baa3 positive) upper house of parliament (Rajya Sabha) approved a constitutional amendment to the country's long-awaited GST bill by the required two-thirds majority.

While other legislative and technical hurdles remain, such as ratification by at least 50% of the state assemblies, the constitutional amendment bill's passage through the upper house removes a key impediment to implementation, and we could see the tax's enactment by the next fiscal year (April 2017 to March 2018).

The GST will have a significant impact on relative prices since the effective total tax rates on some goods will fall as taxes are removed and replaced by a lower-rate GST, while other goods and some services will be subject to a higher effective tax rate, says the report.

However, the GST will have a negligible impact on overall inflation, in line with the revenue-neutral objective.

Furthermore, the emergence of a single unified tax, with the new GST's implementation, points to a much simpler administrative framework, reducing tax governing costs for corporates and, over time, improving the overall cost competitiveness of the corporate sector. Presently, the occurrence of tax at various levels of the production cycle, the presence of multiple taxation authorities, and the need to maintain IT infrastructure increase costs for corporates.

It will also likely translate into swifter mobility of goods between states by removing the barriers present under the existing regime.

The GST will further address the issue of the multiplicity of taxes -- for instance, under the current tax structure, companies pay central sales tax, but are not provided with tax credits for interstate transactions, therefore inflating product prices.

Over time, we believe the impact of the GST will be positive for most corporate sectors across the value chain, spanning procurement of raw materials, manufacturing of goods, sales and distribution of finished goods and services, logistics, and warehousing of goods from manufacturing locations to end-customers.

The overall impact is likely to vary across sectors and it is premature to quantify the precise impact on individual sectors, pending a seamless transition and likely challenges in the interim.

The automotive industry is likely to be a chief beneficiary of the new regime as lower GST rates will further support strong demand for the industry by reducing product pricing and stimulating consumer demand. Meanwhile, swifter truck mobility is also expected to improve utilisation levels and efficiency for freight and logistics operators and warehouses, which will in turn support earnings.