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Benefits from GST to accrue over time, not immediately: Nomura

Tuesday, November 08, 2016

GST benefits are likely to accrue over time rather than immediately, though in the long run the indirect tax regime will boost growth, lower costs and strengthen tax revenues, says a report. According to Japanese financial services major Nomura, Goods and Services Tax (GST) is likely to be fiscally neutral in the near term, while in the long run the benefits are expected to be 'substantial'.

"Currently, proposed version is quite complex due to multiple tax slabs and because coverage is narrow. Therefore, we expect the benefits from GST to accrue over time, rather than immediately," Nomura said in a research note. Over time, as the GST council widens the tax net, minimises the tax slabs and lower the standard tax rates, we expect the benefits to be substantial, it added.

The GST Council has agreed on a 4-tier GST tax structure of 5, 12, 18 and 28%, with lower rates for essential items and the highest for luxury and demerit goods that would also attract an additional cess. "While the GST council has discussed its four-slab tax structure, there will be, in effect, six to seven different tax rates on different items, which add complexity to the tax structure from a compliance perspective," the report said.

It further added that the tax coverage is also not wide: almost 50% of the consumption basket is excluded from the GST net in order to minimise the inflation impact or because of other political considerations. "This means that the collection efficiency (a measure of actual versus potential revenue) of India's GST will be fairly low," it said.

In the near term, Nomura expects the GST to be fiscally neutral, its impact on inflation to be minimal at less than 20 bps and a marginally negative impact on growth in the run up to its implementation. Regarding the feasibility of a April 1, 2017 deadline, the report said that the main risks are IT infrastructure and the smooth integration of all stakeholders.

"Excluding these issues, the GST looks likely to be implemented from 1 April 2017 and, even if IT preparedness issues delay the GST by a few months, we would still expect implementation sometime in 2017," the report said.

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