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Economics

New Indian tax a boon for EM investors

India’s Goods and Services Tax (GST) should remove a wide range of distortions and inefficiencies, benefiting investment, growth, and tax revenues in the medium to long run.

04 Aug 2016

Craig Botham

Craig Botham

Emerging Markets Economist

30 Minutes
Unstructured Learning Time

CPD Accredited

After a decade of waiting, India has finally passed a bill clearing the way for the implementation of a unified Goods and Services Tax (GST). This may sound dry, but when one considers that until this point India has been less of a “single common market” than the European Union, the implications seem much more significant.

By unifying tax rates across goods and services, removing taxes on the movement of goods and shifting the basis of taxation to consumption rather than production, the GST should remove a wide range of distortions and inefficiencies, benefiting investment, growth, and tax revenues in the medium to long run.

Impact on inflation and growth

However, implementation could be messy; the GST will reduce taxes for manufacturers but increase them for service producers. This could have a potentially inflationary impact and result in a negative hit to growth in the short run if manufacturers do not pass this reduction on but service providers pass on their tax increase.

The passage of the legislation is positive for sentiment; investors had become somewhat jaded on the Indian reform story as Prime Minister Modi’s government became bogged down in the same mess of vested interests and political inertia that has plagued successive governments.

Policy outlook improved

That the Bharatiya Janata Party (BJP) can co-operate with the opposition Congress party to enact important legislation, and that it has built support in the upper house, improves the policy outlook and could encourage foreign direct investment and portfolio inflows.

Some caution is warranted though; the GST was in the interest of a range of parties in a way that other reform legislation may not be. Still, this provides a much needed fillip for India, emerging markets, and global investors seeking somewhere, anywhere, to invest.