India: One Nation One Tax

June 26, 2017 |Author: Edward Kerschner, CFA | Categories: Chart of the Week, Emerging Markets

What is Goods and Services Tax (GST)? The GST is one indirect tax for the whole nation, which will transform India into a single market by breaking the current fiscal barrier between states. This would facilitate a uniform tax levied on goods and services across the country. The existing central excise duties and sales taxes makes the tax structure complex. The GST bill is expected to rollout on July 1, 2017.  

Benefits of GST. The tax burden is low in India compared to other emerging market (EM) and developed market (DM) economies, as noted in the chart above. The GST offers a wider net to cast and will improve state finances, which will allow more fiscal room for spending in all areas of infrastructure. For businesses, GST will ensure a robust and seamless indirect tax structure, improving the ease of doing business. Also better tax compliance will prevent leakages thereby passing benefits to the end consumer. The U.S. Federal Reserve estimates a positive impact on India’s real gross domestic product (GDP) of 3.1%-4.2%1.

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1Federal Reserve System’s International Financial Discussion Paper, “The Effect of the GST on Indian Growth”, Eva Van Leemput and Ellen A. Wiencek, March 24, 2017.

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