The adoption of the GST could help raise India's medium-term GDP growth to over eight per cent and create a single national market for enhancing the efficiency of the movement of goods and services, the IMF said on Wednesday.
At the same time, the International Monetary Fund (IMF) also expressed concerns over the implementation of the Goods and Service Tax (GST).
"Although some uncertainties remain around the design and pace of implementation of the GST, its adoption is poised to help raise India's medium-term GDP growth to above eight per cent as it will create a single national market and enhance the efficiency of intra-Indian movement of goods and services," the IMF said in its annual country report on India.
The IMF said larger than expected gains from the GST and further structural reforms could lead to significantly stronger growth, while a sustained period of continued low global energy prices would also be beneficial to India.
Noting that India's tax revenue-to-GDP ratio (at around 17 and a half per cent) remains considerably below than its emerging market peers, the IMF said the implementation of a robust GST should be a key priority given its growth-enhancing effects.
"The GST should have minimal exemptions, uniform cross-state rates, and as few tax rate tiers as possible," it said.
Key production inputs, such as energy and real estate, should be kept within the tax base to enable greater output gains and reduce the tax burden across sectors, the IMF said.
Rationalisation of the structure of direct taxes toward a lower corporate income tax rate with smaller and streamlined deductions and exemptions should continue, it said.
Efforts to improve tax administration should be stepped up as the scope for revenue gains is large.
According to the IMF report, Indian authorities were confident that the outstanding issues related to GST implementation could be settled promptly.
"The GST would provide for a significant improvement over the current indirect tax system. Tax reform priorities going forward include continuing the phased reduction of the corporate income tax rate from 30 to 25 per cent over four years, coupled with a simultaneous reduction in tax deductions," it said.
The GST replaces a plethora of cascading centre, state, interstate and local taxes with a single, nationwide, value-added tax on goods and services.
IMF said the destination-based GST will create, for the first time, a single Indian market, and will greatly enhance India as an investment destination.
By subsuming most of the existing indirect taxes, such as excise, sales and services levies, the indirect tax structure of the country will become less complex and the cost of doing business will decline.
The Indian government expects to roll out GST by July 1 after it could not meet the April 1, 2016, target.
Export competitiveness will rise as logistical costs fall with the removal of interstate tax-induced trade barriers, the tax system becomes more efficient, and use is made of input tax credits on cross-state trade, the IMF said.
It said the GST will also raise general government tax collection, including by fostering compliance and help ensure a decline in the share of the informal sector.
Consequently, it can also support fiscal consolidation efforts which, in addition to economic efficiency gains, should solidify recent monetary policy strides in achieving low and stable inflation in the medium-term, it said.