Any company wishing to sell its wares across India currently faces at least 17 different state and federal taxes. With the introduction of the long-awaited national goods-and-services tax, that number is about to drop to just one. Due for implementation on July 1, the GST will forge one of the world’s biggest single markets for goods and services -- and boost Prime Minister Narendra Modi’s pledge to make doing business in India easier. 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 trainingaround 58,000 tax officers. Some companies want more time to ready for the new regime, but the government is sticking to its timetable. 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. 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. What gets taxed, and at what rate?
The tax will comprise four basic rates: 5 percent, 12 percent, 18 percent and 28 percent. The government released rates for more than 1,200 goods and 500 services on May 19, with tea coming in at 5 percent and chewing tobacco attracting one of the special higher rates reserved for tobacco and luxury goods: 160 percent. Air conditioners, refrigerators, makeup and cars fall in the 28 percent category, while fruit juice will be taxed at 12 percent. As promised, basic staples -- such as food grains, fresh vegetables and milk -- have a zero percent rate, while services such as education and health were also exempted. The rates for any remaining products, including gold, will be decided June 3. Is there a downside to so many rates?
Most countries use a single rate applied to virtually all goods. Critics say this complex system increases the chances of companies and consumers trying to game the system, as well as adding to the workload of bureaucrats. Will the tax impact the economy?
Citigroup’s economists say countries like Canada, Australia and New Zealand experienced a one-time bump in inflation after introducing GST but that prices soon normalized. Looking at the wider economy, the GST could lift growth by as much as 2 percentage points, according to Jaitley. Greater tax compliance and efficiency has the potential to increase government revenue, helping narrow Asia’s widest budget deficit and freeing up funds for schools and highways. And by streamlining the process of buying and selling stuff, the government is betting on a boost to Modi’s "Make in India" manufacturing push. What about the businesses themselves?
Companies will have to overhaul their accounting systems, which may involve one-time investment costs. Business groups, fearing a chaotic implementation, have lobbied the government for a September 1 roll out. They argue that companies -- particularly small-and-medium-sized enterprises that contribute more than 30 percent of India’s GDP -- need more time as they struggle to become tax compliant in the new system. Among the winners, logistics firms stand to gain as it becomes easier to ferry goods across India. Do many other countries use this type of tax?
India will join 160 nations that have a value-added tax, including Poland, Canada and Japan. At the top rate, India’s GST will be among the highest. And with 29 states, 22 official languages and 9 million businesses, the logistics of overhauling India’s tax system are likely to make any tax changes by U. President Donald Trump look easy by comparison.
The Reference Shelf.
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