Nomura: GST may hit growth

Expecting a national goods and services tax (GST) to come into effect from the next financial year, financial services major Nomura said economic growth would be hit and the Consumer Price Index-based inflation would rise in the short run.

While the central tax kitty would increase within GST base would increase, those of states would fall in the short run, it said in a report. However, in the long term, GST would be clearly beneficial for the economy with the economic growth rising and inflation coming down, Nomura said in its report on 'India Goods and Services Tax - Making "One" India'.

Among sectors, GST will be positive for automobile, cement, consumer durables, fast-moving consumer goods, logistics; neutral to negative for utilities, pharmaceuticals and negative for services, the financial major said. The report said GST is likely a game changer and India was never so close on implementation.

"We believe that its implementation will be a game-changer for India. Apart from simplifying the indirect tax structure, the GST should help to create "One" India by eliminating geographical fragmentation," it said.

While the government has been trying to implement GST for the past five-six years, it has never been so close.

"The constitutional amendment (Bill) has already been passed in the Lower House, and a model GST law has been released. While the GST is facing hurdles in the Upper House (where the ruling NDA government is in minority), the political consensus seems to be changing in favour of the GST. We expect these hurdles to be cleared soon and implementation to take place from April 2017 " the report said

Nomura's economics team believed that contrary to common perception, the short-term impact of the GST is likely to be mixed as it could temporarily hurt growth owing to an increase in taxes on services, which account for 60% of India's GDP, and drive up headline CPI inflation by 20-70 bps in the year of implementation due to incomplete pass-through of tax savings by firms.

It could also raise general government (central + state) tax collection with the central government's share (within the GST tax base) most likely rising while that of the states falls.

However, in the long term, the GST will be clearly be positive as gains from a more efficient tax system, greater price competitiveness (reduced costs), and the removal of interstate tax barriers should boost growth via higher exports and investments, structurally lower inflation, and raise government (central + state) tax revenues, enabling greater general government fiscal consolidation, Nomura said.

Nomura further said while the fine print of the GST is still awaited, and most corporates are still evaluating the impact, its sector impact analysis suggests implementation of the GST will be generally positive for consumption-related sectors -- auto, consumer durables,FMCG-- and cement, given the potential reduction in tax incidences.

Logistics should benefit from the removal of inefficiencies in interstate taxation and at check posts. The services sector is likely to see a negative impact from higher tax burdens, it said.