Goods and Services Tax: Impact on Indian economy
A tax expert analyses what GST would mean for the Indian economy.
The India structure, like in any other country, has developed in response to many influences – social, political and economic. These ranged from divided powers between the Centre and states to levy different taxes, distinction between goods and services, tax cascading and arbitrage on rates. Foreign investment decisions and the expected rate of return from projects often suffered due to these distortions.
The proposed Goods and Services tax (GST) is considered the biggest reform in India’s indirect tax structure since the economy started opening to foreign investment. The GST regime to a large extent aims at simplifying the indirect tax levy. With the introduction of GST, taxes such as excise duty (tax on manufacture), service tax (tax on services), central sales tax (tax on inter-state sale of goods in India), value added tax (tax on intra-state sale of goods in India), entry tax (tax on entry of goods in a particular State) or octroi (municipal levy) will all be subsumed by the GST under a single umbrella thereby making India as one nation, one tax. GST proposes to turn India into one common market leading to ease of doing business and savings in logistics costs for companies across sectors.
Due to the federal tax structure, India proposes to adopt dual GST regime in line with the Canadian model of GST. The India GST Model will have two components Central GST (a tax which will go to Central government) and State GST (a tax which will go to state government). The GST will apply across all goods and services, barring few exceptions such as health and education services, agricultural produce etc.
The introduction of GST in India has picked up tremendous pace with the smooth passage of Constitutional Amendment Bill in the month of August 2016 and its presidential assent. The government has formed the GST Council, a body comprising of central and states finance ministers to draft GST legislations and fix administrative challenges which are imperative for the rollout of nation-wide GST. The GST Council in its meetings thus far has progressed on several key issues, such as agreement on rate structure, discussion and agreement on Central and State GST laws, compensation to states for loss of revenue in initial five years of GST implementation etc. The Council continues to meet in January 2017 with the key agenda to sort guidelines on cross-empowerment of Central and state tax authorities, post which the Central GST law will be placed before Parliament and State GST law will be placed before all State assemblies for approval by all States. This is imperative from a timing standpoint, given the aspirational start date of April 1, 2017 for GST.
Though the government has time and again reinforced the targeted GST rollout as April 1, 2017, considering the amount of administrative steps which it has to take, it appears that the rollout may be delayed by a few months to July 2017. In no event, the GST implementation can be delayed beyond September 2017 as the Constitution Amendment Bill which got presidential assent in September 2016 has a validity clause for present taxes up to one year. Post the expiry of one year, i.e. September 2017, the current taxes will cease to exist and therefore, GST rollout cannot be stretched beyond September 2017. The additional time of three to six months (assuming GST implementation happens in July or September, 2017) will provide companies a breather to gear up their systems to meet the new legislative requirements.
It is clear that GST will be the biggest game-changer as it will transform India into a single integrated market, simplify taxes and reduce cascading effect of tax on the cost of goods and services thereby benefitting all stakeholders i.e. government, corporates and consumers. The simplification and harmonisation of the indirect tax regime of the country will reduce the cost of production and lead to a seamless, integrated Indian market, thereby making Indian trade and industry more competitive. A stable, transparent and predictable tax regime will encourage local and foreign investment in India, creating significant job opportunities and attracting new investment opportunities. The immediate beneficiary will be Indian exports which have long suffered from lack of international competitiveness due to differential taxes and the energies expended on complying with the complex tax labyrinth. A 2010 report from the National Council of Applied Economic Research had found that eliminating cascading taxes on exports could increase GDP growth by 0.9 per cent to 1.7 per cent.
GST will boost the ease of doing business in the country, because this single tax (GST) would come as a boon for those industries or businesses that often deal with multiple levies within the country. GST will remove the cascading effect of taxes imbedded in the cost of production of goods and services and will provide seamless credit throughout the value chain. This will reduce the cost of indigenous goods and will promote ‘Make in India’. The sectors which have a long value chain from basic goods to final consumption stage with operation spread in multiple states, such as FMCG, pharma, consumer durables etc, will be benefitted from the reform. GST will also allow deeper penetration of digital services. Further, electronic processing of tax returns, refunds and tax payments through an e-commerce portal without human intervention, will lead to larger tax compliances. Built-in check on business transactions through seamless credit and returns processing will reduce the scope for black money generation, leading to productive use of capital.
The government has also proposed an anti-profiteering mechanism under GST. While this is aimed at protecting consumers and ensuring that the benefit of lower taxes and input credits is shared with consumers, this has generated much debate.
Considering that the countdown to GST has begun, the industry needs to cover a lot of ground in the coming months in terms of IT redesign, pricing strategy, supply chain reengineering etc. With this revolutionary indirect tax, the early movers can capitalise on the options and benefit the most under the changing dynamics of the Indian economy.
Gautam Khattar is a Partner in the Indirect Tax practice of PwC India and has more than 15 years’ experience in Customs and VAT consulting.
*Kishore Kumar, Director – Indirect Tax, also contributed to this article.