The landmark goods and services tax bill passed by Indian parliament after years of filibustering is a key step in the right direction. It is also the most significant tax reform since independence for what is now Asia’s third largest economy. The Indian indirect taxation system is due for a seminal tax reform with the introduction of a unified Goods and Services Tax (GST) as against the prevailing plethora of taxes (value-added tax (VAT), central sales tax (CST), service tax, customs duty, excise duty, entry tax, etc.). As the government has already released the Draft GST Law in the public domain, it is likely that the new GST regime may be implemented from April 2017. The GST subsumes India’s messy plethora of indirect taxes, duties, surcharges and cesses into a single tax.
Nearly 160 countries, have some form of GST or value added tax. In India, the federal and state governments will jointly administer India’s dual GST. This means it will be a set of 38 different taxes: a GST for each of the 29 states and seven federally administered union territories, a federal GST, and an integrated GST on inter-state supplies of goods and services. The very administrative structure of GST is not quite an act of fiscal unification but simpler than the thicket of taxes it will replace.
What promises to one of the world’s most complex tax reforms is expected to be serviced by state-of-the-art technology. Indian software giant Infosys is building a gigantic electronic infrastructure – a GST portal, where taxpayers can register, make payments and file returns. Some 7.5 million businesses will be covered by the tax. Clearly, a successful GST in India will be a minor miracle. No country of comparable size and complexity has attempted a tax reform of this scale. The GST is also a potential game-changer as the burden of taxation moves from the state of manufacture to the state of consumption of goods and services.
The new GST regime will open up an array of opportunities for businesses across India as well as those planning to enter the Indian market. On the other hand, GST may also pose various challenges with respect to business planning, budgeting and investment, as it will change many earlier assumptions regarding business and the market and as a whole. The challenge at hand for the business community is to adapt to the transitional tax reforms by understanding the nuances of the new GST regime.
It is expected to: ease a cumbersome tax system, help goods move seamlessly across state borders, curb tax evasion,
improve compliance, raise revenues, spur growth, stimulate investment and make investing and doing business in India easier.
GST will eliminate the scope of double taxation in certain sectors due to tax dispute on whether a particular transaction is for supply of goods or provision of service such as licensing of intellectual properties like patents and copyrights, software, e-commerce and leasing.
Removal of tax barriers on introduction of uniform GST across the country with seamless credit, will make India a common market leading to economy of scale in production and efficiency in supply chain. It will expand trade and commerce. GST will have favourable impact on organised logistic industry and modernised warehousing.
GST will remove cascading effect of taxes imbedded in cost of production of goods and services and will provide seamless credit throughout value chain. This will significantly reduce cost of indigenous goods and will promote make in India. The sectors which have long value chain from basic goods to final consumption stage with operation spread in multiple states such as FMCG, pharma, consumer durables, automobiles and engineering goods will be the major beneficiaries of GST.
The fears that revenues of manufacturing hubs, such as Gujarat and Maharashtra will be hit are unfounded as such states attract more workers, who make up a growing base of consumers. But some of the biggest beneficiaries will be populous, manufacturing-wise weak states like Bihar and Bengal, who have a large number of consumers.
While the GST will simplify tax structure, it will increase the burden of procedural and documentary compliance. Number of returns will increase significantly so also the extent of information. For instance, a real estate developer or contractor will have to file 61 returns in a year compared to 24 returns at present. Similarly a taxable person providing services from several states will have to take registration and file return in all such states. Currently a single centralised registration is required in such cases.
By and large, it is a win-win situation for both the centre and and the states, completely revolutionary, and the sort of economic backroom plumbing that changes life without even one noticing it.
At the same time it has to be reckoned that India’s GST is also far from perfect. For one, the tax will not be imposed on highly lucrative and rent seeking alcohol, oil products and real estate industries. Shrinking the ambit of the tax means giving up a good chunk of revenues. A steep tax could easily make some goods and services expensive and the government apparently favours an 18% GST rate and stoke inflation. Differences could easily flare up between the centre and the states over the rate and tax-sharing arrangements. Implementing the complex new tax system could be fraught with glitches. Reports say only 20% of companies are actually getting ready for the tax.
Also, more importantly, GST, by itself, is no magic pill. But most believe that even an imperfect GST law should be given a chance to succeed. To bolster this, we can say that no country has claimed a flawless GST since inception, and further and better change in complex systems is incremental.
As the GST roll out takes place, India, a $2 trillion economy with 1.3 billion consumers, becomes a truly single market.
We would like to thank CMA Harshad Deshpande, who is also the Chief Editor of WIRC Bulletin, ICAI, for his effort to make the content on GST available to larger section of people and for dissemination of knowledge on the topic , which is of prime importance not only for the taxpayers but also for common man of the Country.
Article been published with permission from CMA Harshad Deshpande given on behalf of Western India Regional Council of India of The Institute of Cost Accountants of India.