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Special Update on India’s Goods and Services Tax

Unified Market, Significant Efficiency Gains and an Estimated 1-2% Rise in GDP

Bullet points Estimated to boost India

 

Earlier this month, the Indian Parliament passed the Goods and Services Tax (GST) Bill, a move widely hailed as one of the most significant economic reforms in the history of independent India. The bill will transform India’s taxation system by harmonising its myriad central and state levies into a single, national sales tax. This is expected to create a unified market that allows for the seamless transfer of goods and services across the country, significantly reducing the cost and complexity of doing business in India, and potentially increasing India’s GDP growth rate to 8.5% to 10%. Importantly, the passage of this reform also adds further credibility to the BJP-led NDA government’s ambitious reform agenda, and sends a signal to both international and domestic investors that Prime Minister Modi is pro-business and committed to the broader reform agenda, which is critical to India’s long-term growth ambitions. This note provides a brief overview on GST, its expected impact on the Indian economy, and the implications for investing in India.

 

Key Highlights of GST

 

Implications for Investing in India

From an immediate investment point of view, the passage of this legislation bodes particularly well for India’s manufacturing sector, which has longer supply chains, and involves the transport of inventory across long distances (including state lines). Within the manufacturing industry, profitability margins of export-driven industries like pharmaceuticals, textiles, automobile components and chemicals should improve by 7–8% and these sectors are likely to see increased investment activity over the next 6–12 months.

By creating a uniform and transparent tax base, GST is also expected to bridge the cost gap between the organised and unorganised sectors in India (on account of most unorganised sector players avoiding tax obligations); this should positively impact sectors like logistics and fast moving consumer goods (FMCG), where there is a particularly large unorganised sector presence.

 

Overall Conclusions

As highlighted in GPC’s June Sign of the Times, the BJP government has made significant progress across a number of key reform areas, and the GST Bill is undoubtedly its most important economic reform to date. There are of course, important challenges that lie ahead for the government, and the passage of other big-ticket reforms may prove to be more complicated. However, by passing the GST Bill, the BJP government has demonstrated its political acumen, and more importantly, its commitment towards economic reforms, and this can only serve as a catalyst for setting India on an economic path to become one of the major powers of the 21st century.