GST watered down, can still add 0.6% to GDP growth: HSBC

Says if the GST rate is pegged at 20%, the impact on inflation will be 'positive but manageable'

Terming GST as one of the most promising reforms on anvil, global giant HSBC today said the bill has been "watered down" but can still add a "sizeable" 60 basis points to India's GDP growth rate.

The Goods and Services Tax (GST) seeks to replace all indirect taxes with a uniform nationwide levy. The bill has been approved by the Lok Sabha and it was referred to a Rajya Sabha Select Committee during the last Parliament session.

HSBC said the benefits of the country's "watered down but still powerful GST reform" could be immense.

The panel has given its report endorsing majority of the provisions, while suggesting changes in compensation to states and definition of supply for the purpose of states levying additional one per cent tax.

According to HSBC, if the GST rate is pegged at 20 per cent, the impact on inflation will be "positive but manageable", while if pass-through for services is higher and if the GST rate is above 20 per cent, the impact on inflation could be "meaningful".

On the impact on growth, HSBC said that the "diluted" GST could still add 60 basis points to India's growth, smaller than the 130 bps potential growth estimate projected earlier, but still "sizeable".

The constitutional amendment bill first needs to be passed with a two-thirds majority in the upper house, while the amendment will then have to be ratified by at least 15 state legislatures.

The Parliament and state legislatures also need to pass GST bills that impose central and state GSTs and alongside this, the GST Council will decide, with a three-quarter majority, the functional issues such as the rate of GST and the list of goods and services to be exempted.

The process for implementing GST has been "arduous" and much remains to be done, HSBC said.

"This makes the tight deadline on April 2016 touch and go, although we continue to believe the tax will eventually get implemented later in the year," it added.

"Given these arduous steps, whether or not the GST will be implemented by April 2016 is touch and go, although we continue to believe that it is likely to be implemented later in FY17," HSBC said.

The current monsoon session of Parliament ends tomorrow.

The GST Constitution Amendment Bill is waiting passage of the bill from the Rajya Sabha, where the ruling NDA lacks a majority.