The India government has proposed the launch of the landmark Goods and Services Tax (GST) bill during H2 2012 in order to reduce the compliance burden for companies and meet international consumption tax standards
- With the law meeting international standards and signaling the government’s attempts to simplify the process of doing business in India, FDI is expected to rise as well
- Initial studies show that it will add about 1.5% to the GDP due to the lower compliance burden, more competitive exports, and higher tax revenues
Frontier Strategy Group View:
Companies can expect the law to be delayed due to the bargaining that will take place between the state and central governments in terms of revenue sharing and level setting
The 28 state governments have vastly differing interests; those with higher revenues are more unlikely to share their wealth with the central government (see map below)
While the reform is headed in the right direction, companies will bear the cost of inefficient resource allocation and more expensive logistics as the differing state GSTs will continue to divide the Indian market into several sub-markets.