India's passage of a long-awaited Goods and Services Tax (GST) bill is an important reform which will remove barriers to trade, improve economic efficiency and lead to higher growth in the long run, says Fitch Ratings.
“Parliamentary approval sends a further positive signal of the government's ability to enact major reforms following the passage of a national bankruptcy law in May,” says Fitch.
The GST bill is a constitutional amendment which will allow for a single national indirect tax to replace a myriad of state and national taxes. This will result in a substantial simplification of the indirect tax system, leading to potentially significant productivity gains and boosting long-term growth.
“It remains to be seen, though, whether the introduction of a national GST will lead to a higher intake of tax revenue. This will depend on a number of factors, such as the level at which the tax rate will be set,” says Fitch.
The rate still needs to be decided by the GST Council, which includes representatives from the Ministry of Finance and each state government.
Fitch notes that the introduction of national GST, though positive from a longer-term economic perspective, should not have a substantive effect on the fiscal account in the short term.
India's fiscal balances are a weak point of the sovereign's credit profile, with both general government debt and the deficit well above its 'BBB' peer medians. Fitch expects the debt to reach 69.4% of GDP and the deficit to fall to 6.8% in FY17.
Fitch says the passage of the bill is an important indicator of India's ability to push through transformative structural reforms. This is especially the case, as it required a two-thirds majority in both houses of parliament and cross-party consensus for passage as a constitutional amendment.
The bill will now go back to the lower house for final approval, and will then require ratification by more than 50% of state legislatures.
More broadly, the GST bill is part of an ambitious policy drive which includes a series of reforms. In addition to the GST and aforementioned bankruptcy law, the agenda includes liberalisation of the FDI regime, financial and agriculture sector reforms, and changes to cut red tape and improve the efficiency of administration.