It has been hailed as the biggest tax reform in India’s 70-year history as an independent nation. The good and services tax (GST) bill was passed into law by Rajya Sabha last August 3. With its implementation starting on April 1, 2017, it will create a national value-added tax in India and create a common national market in the country of 1.2 billion people.
The GST has been billed as a game-changer for the Indian economy. It will develop a common Indian market, minimize the cascading effect of the tax on the cost of goods and services, and affect almost all aspects of the business operation in the country—from the pricing of products and services, supply chain, accounting, and tax compliance.
The GST is basically a ‘destination-based tax’ meaning it will be levied on where the goods or services as consumed, and not where they are produced. It puts an end to the complicated, indirect tax system in India where the Center and the State levy overlapping taxes.
There have been proposals to amend the Constitution and change India’s tax system with the GST. Then the Prime Minister Atal Bihari Vajpayee had initiated the discussions on the GST. In 2006, Congress had looked into it. In March 2011, a constitution amendment bill was introduced but was lapped with the dissolution of the 15th Lok Sabha.
The enactment of the GST is definitely one of the highlights of Prime Minister Narendra Modi’s reign.
The following are the expected benefits of GST on the Indian economy:
For instance, a mobile phone distributor buys mobile phones from a manufacturer and sells it to a wholesaler. In the present system, the distributor has to bear the burden of paying excise duty. Thus, he’d rather pay without the invoice as it can add up to his total costs.
But with the GST in full effect, the distributor will gain credit for all the taxes paid at the previous stage. This would encourage him to pay with an invoice. Thus, it is expected that all traders will opt for taking a bill for their purchases.
In fact, Indian trucks average a mere 80,000 kilometers a year no thanks to these delays and gridlocks. In comparison, trucks bringing various commodities across the US average 400,000 a year.
With the GST in full effect, those long lines at interstate checkpoints would be a thing of the past.
Many key sectors of India’s economy are projected to benefit from GST. Among these are:
In India, most IT firms have different delivery centers and offices servicing a single contract. But with the GST rolled out, there’s a possibility that firms would require each delivery center to issue a separate invoice to a contracting party. The costs of electronic products like mobile phones and laptops are also anticipated to rise as duty on manufactured goods could go up to 18 percent from the current base of 14 percent.
On the flip side, however, prices may increase by 20 percent if the recommended 40 percent GST for tobacco and aerated beverages is approved.
With the GST, dual taxation will be avoided. In the old system, states often have to ask where to levy the tax—the place where the seller is located, or the place where the buyer is located.
With the GST everything is clear now—the tax will be in the state where the consumer resides. Thus there will be no need to pay for other taxes like entry tax, VAT on sales, and excise on manufacturing.
The GST also means there will be no complicated paperwork that buyers online would have to accomplish. In 2015, several e-commerce firms like Amazon India and Snapdeal ceased delivering products in the northern Indian states of Uttar Pradesh and Uttarakhand because tax authorities in those states required the filing of VAT declaration form at the time of delivery.
Aside from the negative impact of the new tax system on certain sectors of the Indian economy, there are also other challenges that need to be hurled such as:
One of the worries of those who opposed the GST is that it can lead to imports being cheaper compared to goods produced in India. Under the GST imports are entitled to a set-off against the final selling price which is not permissible under the existing tax regime.
Once the GST has been rolled out, it would replace taxes like countervailing duty, a special additional duty of customs, among others. With lesser taxes, the prices of imported goods in the market will likely go down as well.
That would have a detrimental effect on the manufacturing sector in India, which is beset by cumbersome labor, high taxes, and various regulatory laws in most states. As such, there is a fear that the GST would hurt the Make in India campaign.
India will have the most complex version of a GST in the world. In most countries, GST pertains to one tax for all commodities and services. It is also applied throughout the nation.
In India, the central government and the states are allowed to concurrently levy GSTs. States can also levy service tax, which is a central levy. In effect, there will be 31 GST enactments (for the 29 Indian states and the territories of Delhi and Puducherry) needed.
Moreover, states will be able to levy sales on potable alcohol, aviation fuel, diesel, and petrol. On the other hand, the central government can levy excise duty on all other goods including tobacco and tobacco products.
There will also be a lot of issues that need to be addressed on e-commerce transactions and restricted credit. Although each state will have its own GST, there will be multiple rules for each act. Moreover, there will be separate credit rules for integrated GST, central GST, and state GST. Studies also suggest there will be a substantial increase in the costs of paperwork and compliance.
With these issues to be addressed, many quarters are calling for the implementation in stages. The argument that this strategy will reveal possible hurdles in need of attention, as well as improving the IT infrastructure that is vital to a successful GST.
Although there are apprehensions on the implementation of the GT one thing is for sure—many sectors of the economy are looking forward to the day when the GST will be finally implemented. From the looks of it, this could be one way to help the third-largest economy in Asia expand even further.