India's New GST Should Spur Growth and Reduce Headaches
By Simran Juneja, Consultant, Indirect Tax
As part of Prime Minister Narendra Modi’s sweeping modernization plan, India recently voted to replace its labyrinth of confusing, overlapping federal and state taxes with a single tax on goods and services, facilitating the movement of products between states and promoting tax compliance.
The Goods and Services Tax Bill (GST), which passed in August, could increase domestic product growth by one to two percent, according to the country’s Finance Minister Arun Jaitley. Western banks estimate a more conservative but still significant increase of .5 to .8 percent.
India’s current growth rate of nearly eight percent rivals China’s, and has lately exceeded it. Additional growth should boost both domestic and foreign investment and create more jobs.
Some 7.5 million businesses and 1.3 billion consumers will be affected by the new GST system, which is expected to raise tax revenues as well as stimulate growth. The aim of these changes is to ease the existing cumbersome tax system and facilitate the movement of products and services across state borders in a single market.
Basically, the new system is similar to a value-added tax (VAT), where the tax is borne by the final consumer. However it is not without its complexity due to India’s existing dual federal system. Essentially, different types of GST will be levied.
The Model GST Law introduces a dual GST system whereby a central goods and services tax (CGST) and a state goods and services tax (SGST) will be levied on transactions. Both central and state authorities will legislate, levy and administer the CGST and the SGST respectively.
A GST council has been established to provide final details, including specific exemptions. These details are expected to be released to the public by January 2017.
All Businesses Affected
India’s new GST system aims to make India more attractive to foreign investment, as the country’s current indirect tax system is often considered a barrier to doing business there. The implementation of the new GST regime on April 1, 2017, will require businesses operating in India — as well as overseas businesses liaising with their Indian counterparts — to overhaul their current indirect tax processes and understand their obligations under the new system. Most companies have not yet prepared for the tax.
Under certain circumstances there will be an automatic requirement for non-resident businesses trading in India to register for GST. Also, businesses may have multiple GST-registration obligations, depending on the nature of trading activities with respect to the interstate movement of goods.
In terms of its economic effects, the new law is a mixed bag — some companies will pay a higher rate and others will find their taxes lowered. The government is said to favor a 17 or 18 percent rate, which some fear could stoke inflation. Whatever the finalized rates, one thing is certain: Time is money, and the streamlined movement of goods and more efficient delivery of services will benefit everyone.
Though far-reaching in scope, the new tax fails to apply to lucrative sectors of the economy such as oil and alcohol. Moreover, the tax could make certain goods and services more expensive in the short term, placing additional burdens on a population already coping with high inflation levels.
Arguments about rates and sharing arrangements could arise between states and the federal government, delaying implementation.
The magnitude and complexity of the indirect-tax-system changes, combined with the relatively short period for implementing them, will create challenges for businesses. For example, businesses will have to scramble to assess the new system’s effects on pricing and profitability.
Despite the unresolved questions, the passing of the GST bill is a major milestone for India, whose deeply entrenched bureaucracy is trying to catch up with the fast-moving world of technology, where so many of its workers play a vital role. Some nationals have called the new law India's most important tax reform since 1947. Though there are bound to be some hiccups in the short term, a World Bank official predicts that the long-term effects will be “hugely positive.”
For more information, watch Simran’s webinar Doing Business in India: The New Goods and Services Tax.