1. Will it really happen?
It’s been a long time coming -- the tax was first proposed in 2006 -- but in April, India’s president cleared the final procedural hurdle by signing off on some GST-related bills. The last flurry of activity will include rolling out the tax’s technological backbone (known as the GST Network) and training around 58,000 tax officers. Some companies want more time to ready for the new regime, but the government is sticking to its timetable.

2. What’s so good about the new tax?
Those 17 or more state and federal levies on everything from electricity to Gucci handbags complicate efforts to sell products to India’s population of 1.3 billion (about four times bigger than the U.S.). Under the current system, a product will be taxed multiple times and at different rates. In another change, the GST will apply to goods at the point of consumption, rather than where they are produced. That will reduce the cascading effect of taxes, allowing producers to easily claim credits and minimizing the opportunity for corruption.

 

Eoin Treacy's view

Many of the issues India faces are of its own making, so simplifying the sales tax structure is a major endeavour which should have a significant positive impact on both trade and investment. Many observers have commented on the slow pace of reform during Modi’s administration but this is a landmark piece of legislation which highlights the scope of the government’s ambition to push through meaningful economic change. It also potentially suggests to the electorate that Modi will need a second term to deliver more of what people want. 

The Nifty Index has been rallying in a consistent manner since late December with a series of small ranges posted one above another. With the July 1st start date of the new tax structure quickly approaching there is evidence of a pause as investors adopt a wait and see attitude. 

The potential for a one time step-up in inflation is likely to have been a catalyst in the recent loss of momentum for the India rupee, during what has also been a firm few weeks for the Dollar. Nevertheless, a sustained move back below the trend mean would be required to question medium-term scope for additional upside.