Business conditions in India’s services sector improved in June. The Nikkei Purchasing Managers’ Index (PMI), a monthly survey, showed that services PMI climbed to an eight-month high of 53.1 in June from 52.2 in the previous month. A reading above 50 indicates economic expansion, while a one below 50 points towards contraction.

However, business confidence among service providers took a beating owing to uncertainty surrounding the impact of the goods and services tax (GST). Earlier, the manufacturing PMI too had shown that manufacturers were jittery about GST.

As a result, the Business Expectations Index for services fell to a four-month low of 56.2, compared to 57.8 in May. In the case of manufacturers, the Future Output Index fell to a three-month low of 59 in June, compared to 61.7 in May.

Under GST, services will be taxed at a rate of 18%, higher than the 15% levied earlier. A fall in demand for discretionary services related to entertainment and recreation is anticipated due to the rise in prices.

Secondly, the cost of compliance could see a sharp rise. The concept of centralized registration no longer exists. Now a service provider will have to get state-wise registration done for each state it operates in. Those having a pan-India presence will be hit the most.

There is limited clarity on how the input tax credit mechanism would work for services. Also, implementing anti-profiteering rules would be more complex for services than products, given the intangible nature of the former.

Sharing similar concerns, Pollyanna De Lima, economist at IHS Markit and author of the Nikkei PMI report, said, “Nonetheless, the falls in confidence levels highlight no easy walk to stronger economic prosperity. Optimism weakened at goods producers and service providers alike, hampered by concerns among some firms that the goods and services tax could harm consumer demand, with competitive pressures also seen as a threat to the outlook."

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