Economic Analysis - Narrow Economic Gains From Proposed GST Reforms - JAN 2017

BMI View: India's proposed GST system is likely to disappoint investors as its complex and tiered structure will result in narrower economic gains compared to an alternative single rate system. While the tiered system may allow the finance ministry to compensate states for revenue losses without increasing overall tax rates, the tiered system could encourage higher evasion rates and will be difficult to administer.

We believe that the outlook for India's GST reform has dampened after the GST council failed to reach an agreement on the structure of the country's new GST system during its meetings between October 16 and October 18. Although the proposal for a tiered GST system attempts to strike a balance between maintaining state revenues and avoiding regressive taxes, we believe that it represents a departure from the primary intention of the GST to simplify indirect tax procedures. While the reform would still be positive for India's growth and fiscal consolidation plans, approval of an overly complex GST system would likely weigh on investor confidence and cast doubts on the government's ability to deliver high-quality policy reforms. We therefore maintain our forecast for the country's central fiscal deficit to reduce gradually to 3.3% of GDP in FY2017/18 (April - March) from 3.7% of GDP in FY2016/17.

Narrow Economic Gains From Complex GST Proposals

GST To Replace Multiple Indirect Tax Systems
India - Major Sources Of Indirect Taxes, % Of Total Tax Revenue
Source: Ministry of Finance, BMI

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