India: Major fiscal reform improves the outlook for business and public finances
Event
The long-awaited Goods and Services Tax (GST) reform has decisively moved forward after the bill successfully passed the Parliament’s upper house in early August.
In practice, the tax system should be largely simplified within a centralised system whereby the GST will replace the multiple federal and state taxes.
The power of levying the GST will be split between the central and state authorities. In an optimistic scenario, implementation is planned as from April 2017.
Impact on country risk
Despite several measures to make the environment more business-friendly and enhance economic liberalisation, Mr Modi has often been criticised since he came to power for absence of fundamental reforms on his government agenda.
The GST reform is undoubtedly a major one and a big step forward as it had long been a recurrent goal for previous governments. India’s tax system is indeed old and largely unreformed since the country’s independence. In the medium term, the GST reform should benefit the economy, public finances and enterprises.
The tax base should be widened – notably by reducing evasion from the large informal economy and by increasing currently low taxation on the dominant services sector – and average tax rates ought to be lowered, whereas costs for corporates should be curtailed.
The future success and efficiency of the reform will depend on its implementation, particularly on limiting goods and services exemption from GST. Politically, the GST reform is a significant victory for Mr Modi as it has long been stalled at the upper house due to Congress Party’s systematic opposition.
Looking forward, the approval of two other key reforms, namely the labour market and land acquisition laws, seems much more contentious due to their expected social and poverty impact. They therefore remain a remote prospect, at least during Mr Modi’s current mandate.
Country risk analyst Raphaël Cecchi , Credendo Group
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