Progress on GST reform in India is “encouraging”, Development Bank of Singapore (DBS) said today and noted that most services will be pegged at 18 per cent, higher than at present.
The GST Council last week announced a tiered structure — 5 per cent tax on mass consumption/essential items, 12 per cent and 18 per cent as standard rates and 28 per cent.
An additional cess will be levied on luxury and sin items to compensate states for potential revenues losses, said DBS in its daily market report.
Granular details on the classification of the exact goods is yet to be finalised, along with a final say on the rate for services.
The inflationary impact has, however, been softened by exempting half of the Consumer Price Index (CPI) basket, along with a likely reduction in taxes on white goods/ durables.
DBS said potential impact would likely be half of its earlier estimated 40-70 bps range.
Either way, the difference between old and new tax rates will dictate the extent to push up in inflation.
Meanwhile, spending on items for which taxes is likely to rise, will increase ahead of the implementation, providing a short-term boost to growth before tapering off a quarter or two and stabilising thereafter, believes DBS.
Decision on the division of audit and assessment of taxpayers, however, was inconclusive.
The GST council is due to reconvene on November 24-25, after an informal meeting on November 20.
Next up, draft legislations need to be completed by mid-November. The CGST (central GST) and IGST (integrated GST) bills will be tabled in the winter session of Parliament that runs from November 16 to mid-Dec.
State GST bills will be passed by the respective states.
Thereafter setting up the ecosystem, including the operational framework, documentation, accounting, infrastructural, IT/software and educating users will take priority, said the Singapore bank.
Timebound and speedy decisions such as the ones demonstrated last week (week ended Nov 5) increase the odds of a timely implementation next year.
April 2017 has been flagged as the deadline, with a push to September also unlikely to trigger much disappointment, provided the roll-out is efficient with minimal disruption to the stakeholders.
Move to a GST regime aims to make the industry more competitive and cost-effective through lower logistics and procurement costs, it highlighted.
The inflationary impact is also likely to be more subdued than feared given the exemption/ low rate baskets.
The implications will become clearer as more details emerge in the months ahead, says DBS.