Hopes are high that the long-standing Goods and Services Tax (GST), which has been pending for more than a decade, will be passed in the ongoing monsoon Parliament session.
"Failure to pass the Bill in the ongoing monsoon session could puncture some of the recent positive sentiment," DBS said in a research note.
The GST Bill, which intends to convert 29 states into a single market through a new indirect tax regime, was earlier planned to be introduced from April 1 this year, but the deadline was missed as the legislation to roll it out remains in limbo in the Opposition-dominated Rajya Sabha.
Implementation of GST is expected to lead a temporary rise in inflation, which will typically last a year.
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The impact on inflation will wear off as these prices enter into the base, softening inflation the year after.
Similarly, on the growth front, the GST impact on growth will likely be negative in the short-run but positive longer-out given the benefits of a unified taxation regime.
Moving to a GST regime will be beneficial for the economy on multiple counts. While a single-rate system would be ideal, it could prove difficult to pass, the report said.
The odds are high that the authorities initially adopt a multi-tiered and diluted version of the GST.
If so, a move to a single rate remains possible over the medium-term.
Either version is preferable to the current VAT, DBS said.