India Will Be a Better Bet for Foreign Investors After the GST Bill

Published on 05 Aug, 2016

India GST Investment Research

Marketed as “one nation, one tax”, a single levy applicable throughout the country will turn India into a single, unified market that does away with the calculus that was inter-state taxation.

The Upper House of the Indian Parliament passed the Goods and Services Tax (GST) Bill on Wednesday August 3, 2016. While there are still quite a few details about implementation that still need to be established and ironed out, the entire nation will be adopting a uniform taxation system for goods and services, an agreement that’ll be iron-clad in less than a year if everything goes to plan.

 

It’s Not Set Yet

The bill still needs to get through some legislative hoops before it’s implemented however, needing approval from India’s Lok Sabha (the lower house of parliament) , a majority of its 29 state governments, as well as another bill that details its implementation. 

This bill has been in the works for well over a decade though, and that’s plenty of time to acclimatize to something. Having already gotten past the worst rungs of its approval process, and with most of the deciding states more or less on board, the GST’s last leg of the approval process should wrap up without a hitch.

 

How Does It Impact India?

While that’s all well and good, what does the GST really mean for trade and commerce within the country?

The significance of a single tax rate that’s uniformly applicable to all goods and services for country as large and diverse as India cannot be overstated.

The GST will meld a myriad of taxes at the Central and State levels into fewer taxes — a Central GST, a State GST, and an Integrated GST. The GST covers all but a few goods such as alcohol and petroleum products. Thus, for all practical purposes, the GST will be a default tax for almost all goods and services across the country.

A uniform taxation framework is immensely significant from tax administration point of view.

The actual rate of GST is yet to be established and revealed at the moment, and markets are eager for information that’ll help assess which sectors will come out on top, and which could be pulled under by heavier taxes. Assuming a speculated rate of ~17 or 18 per cent GST however, erstwhile highly taxed sectors such as automobiles, cement, logistics, retail, and consumer goods are expected to benefit, whereas sectors like telecom — where service tax (~15 per cent) is applicable — may witness higher tax outgo.

For the most part though, policy-makers will do their best to set GST levels such that overall fluctuations in taxation remain relatively neutral after the bill’s implementation. The net effect could mean a surge in trade and consumerism within the country however, bolstering its already bettering economy.

 

Will the GST Beget More Foreign Investments?

The GST’s implementation will probably make a bigger difference to foreign investors.

Besieged by a volatile global macroeconomic environment beset by slow growth, falling commodity markets, and ineffectual stimulus strategies by central banks in developed markets, a stable Indian market will seem far more appealing to foreign investors.

India is a large consumption-driven economy, with relatively untapped domestic demand (thus far) by global standards.

Something like the GST bill coming to be is indicative that the government is functioning cohesively, and that it’s capable of bringing about the political consensus necessary to implement essential reforms.

This stands in contrast to government inactions in several developed nations that are beset with problems at the government level, such as the obstructionist strategies of the opposition party in the US, or the fiscal conservatism and political pressures to adopt more populist policies in Europe.

The GST is a harbinger for several other reforms that the Government of India is spearheading, and they’re all angling to make India a lucrative investment option for foreign investors.



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