One of India's most ambitious economic reform plans in 70 years will ultimately boost tax receipts and provide simplicity for businesses, but the true impact may not be felt for at least a decade due to implementation challenges, experts said.
After several rounds of deadlock in the parliament, India rolled out the Goods and Services Tax (GST) on July 1, replacing a thicket of indirect central and state levies that critics argue have blunted economic competitiveness and hobbled efforts to lift more out of poverty.
Observers have described the reform as the most meaningful change to India's tax regime since the country became independent in 1947.
The government will introduce GST for a variety of goods and services along four main rate bands: 5-, 12-, 18- and 28 percent irrespective of the location of purchase. Certain goods such as fresh meat, eggs, milk, among others, will not be taxed, according to a list compiled by the Economic Times newspaper.
Vishnu Varathan, a senior economist at Mizuho Bank, told CNBC's "The Rundown" that the full economic potential of this historical tax reform could take years to materialize as India would first need to build up its tax ecosystem.
"Long term, and we're talking more than five years, we're talking about eight to 10 years, I think it will lift growth potential, that's for sure," he said.
In the near term, the reform will formalize more of India's untaxed economy, which would increase efficiency but not the size of the gross domestic product (GDP), he added.
HSBC in a report in May also predicted the GST rollout will add about 40 basis-points to India's GDP growth in the medium term, lower than their initial forecast of 80 basis points. Pranjul Bhandari, chief India economist at HSBC, explained that in HSBC's previous estimate, the growth fillip was meant to come from "having the same tax rate for each product across all states and having the same tax rate across all goods and services."
"Given that the second source of efficiency gains is getting compromised in the multiple rate structure, the growth impact could halve, to the 40bps ballpark," Bhandari said in the note.
Though experts agree on the long-term benefits, including the ease of doing business in India and bringing swathes of the country's informal economy inside the tax net, they say in the near term there could be significant disruptions.