The long-pending Goods and Services Tax (GST), touted as India's most far-reaching reform of indirect taxes, is likely to be implemented after the general elections this year, according to UBS.
"A broad consensus on earlier contentious issues is now in place and the current delay seems largely political," the Swiss global financial services company said in a research note. "Our discussions with various stakeholders indicate that the GST is likely to be implemented after the elections."
The proposed GST aims to replace multiple indirect taxes in India such as central excise, additional excise, value-added tax and service tax. Uniform taxes will be levied by the central and state governments through a common system of tax collection.
"The introduction of the GST is a key reform measure that could have immense macro implications for India's growth potential," the UBS report noted.
The biggest positive from the introduction of GST would be higher revenue for the government that would come from broadening the tax base and increasing compliance.
"Higher tax collection obviously implies a lower fiscal deficit and hence is positive for the economy," UBS said.
The report noted that the experience of states after the introduction of value-added tax (VAT) supports the case for higher tax revenue. According to UBS, revenue for states increased beyond trend after state-level VAT was introduced in 2005-08.
Income tax revenue for the government of India increased to 5.9% of GDP in FY08 from 3.7% of GDP in FY04 after the implementation of the Tax Information Network.
GST could reduce distortions and inefficiencies and foster a common market in India. This has productivity implications and should enable higher GDP growth.
Citing various studies, UBS said GDP at both the national and state level could go up after implementation of a taxation system such as the proposed GST.
A study by the National Council of Applied Economic Research suggests a 0.9-1.7% increase in GDP from GST implementation, while the experience of countries such as Canada shows a 1-2 %increase in GDP from implementing GST, UBS said.
"Implementation, after the requisite legislative approvals, will take time and so will the benefits. The final GST may also not be perfect but as we have seen in past tax reforms, a lot of the benefits do flow eventually," UBS added.