GST likely to boost India's long-term growth prospects, says Fitch Ratings

India's new Goods and Services Tax (GST) will unify the indirect tax system and remove domestic barriers to trade, which should support productivity gains and GDP growth over the long term, Fitch Ratings reported.

The GST that came into effect on July 1 is relatively complex, including multiple tax rates for different goods - ranging from 0-28 percent, or higher where 'sin taxes' are applied - and requires frequent filing in all states in which a company operates.

The GST is unlikely to increase revenue in the short term. However, it is likely to boost revenue indirectly over the long term, as it supports GDP growth and encourages tax compliance. A benefit of value-added taxes like India's GST is that retailers are required to show compliance right along the supply chain to claim refunds.

However, there are significant short-term risks involved in the GST implementation, emphasized by the late changes to the bill and the disruptive roll-out of demonetization. High compliance costs for businesses and administrative difficulties have been problems in some emerging economies that have introduced value-added taxes, particularly those that had complex systems, under-resourced bureaucracies and short lead-in periods.

Meanwhile, India's new system will overhaul the way businesses operate, affecting their financial reporting, tax accounting, supply-chain management and technology requirements. The country’s large bureaucracy is likely to be tested by the new system, with further potential implications for businesses.

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