India’s GST challenge makes Donald Trump’s tax overhaul look easy

PM Narendra Modi's GST Challenge Makes Donald Trump's Tax Overhaul Look Easy

The challenge is daunting: Convert an economy of more than 1 billion consumers, 29 states, 22 official languages, 9 million businesses all operating under a spider’s web of taxes, arcane regulations and competing political ambitions into a unified common market.

But that’s the goal as India gets ready to roll out a goods-and-services tax after a 10-year battle to win over the country’s powerful states and fractious federal parties. Designed to free up trade, foster tax compliance and make it easier to do business in the world’s fastest growing major economy, the GST is scheduled to go into effect on July 1.

 “It has been a huge challenge with countless man hours,” said Anita Rastogi, Partner, indirect taxes at PricewaterhouseCoopers LLP, New Delhi, in a telephone interview. “The July 1 target is looking feasible. And the effort that has been put in is worth it because this will lead to greater tax compliance and better efficiency.”

Until now, a product or service in India is taxed multiple times at different rates as components are added and shipped between states. Everyday more than 20,000 truck divers wait in queues up to three kilometers long to pay an entry fee at 122 New Delhi checkpoints, food rotting, tempers fraying, costs rising.

The new levy will apply at the final point of consumption, reducing the cascading effect of taxes on tax, allowing producers to easily claim credits and minimizing the opportunity for corruption. Those trucks at the New Delhi border? They’ll see their waiting time at check points drop by half, according to economists at Nomura Holdings Inc. Prime Minister Narendra Modi’s government says introduction of the tax may bolster growth by as much as 2 percentage points.

Below we look at the challenges and potential rewards from the country’s biggest ever tax reform.

Scale

A GST for India will in effect create one of the world’s biggest free trade areas. Its population of 1.3 billion is more than that of U.S., Europe, Canada and Australia combined and more states than the European Union’s 28 members.

The tax will replace at least 17 state and federal levies on everything from electricity to Gucci handbags to border crossings. From the powerful Uttar Pradesh with a population the size of Brazil, to the tiny seaside region of Goa, India’s states currently set their own taxes and charge duties. The GST will sweep those away and harmonize the indirect tax system across the nation.

Effort

President Donald Trump is girding for a political battle to overhaul the U.S. tax system. It took India 10 years to get the GST through. Modi had opposed the tax as chief minister of the western state of Gujarat but changed his view after becoming premier in 2014. His ruling BJP party had to win over all opposition parties, including the Indian National Congress, which had originally proposed the tax a decade ago.

Then there’s the logistical mountain to climb. The government is setting aside about 28 billion rupees ($435 million) over five years to set up a network that can handle invoices worth 36 billion rupees a year and is training more than 61,000 government officials to operate it. Indian software giant Infosys Ltd., will provide the digital backbone to handle 55,000 users concurrently. The roll out, which is expected to encourage compliance in a country notorious for tax evasion and hoarding of cash, has missed its April 1 deadline.

Rates

India’s tax will comprise four basic rates: 5 percent, 12 percent, 18 percent and 28 percent. While officials are yet to reveal final details of what will fall into each bracket, Finance Minister Arun Jaitley has said 50 percent of items in the retail inflation basket won’t be taxed to protect consumers.

Other mass consumption items like spices are likely to attract a 5 percent rate while processed foods will be charged 12 percent. Household goods like soaps, toothpaste, and smartphones are likely to be in the 18 percent bracket while other durable goods such as air conditioners will attract 28 percent duties. Luxury goods such as tobacco will be taxed at a higher rate.

Collections at the higher rate, or in excess, will go to a fund, which will be used by the federal government to compensate states for any loss in revenues. Critics have argued that the multi-layered tax system is too complex but compromises had be be struck to get the GST accepted in India’s large and diverse country.

India will be joining 160 countries that have a value-added tax, including Poland, Canada and Japan. At the top rate, India’s GST will be among the highest. The U.S. has always resisted a national sales tax.

Inflation

While some fear the GST could pressure inflation as some goods get taxed at higher rates and businesses sneak in cost increases, economists say countries like Australia and New Zealand experienced a fleeting increase in inflation after GST implementation, which normalized in a year.

Indian inflation is expected to rise by less than 20 basis points in the near term, Sonal Varma, chief India economist at Nomura Holdings Inc. in Singapore, said in a report last month. The central bank is unlikely to react to any rise in inflation, in the same way it called the impact from India’s cash ban in November on inflation and growth as temporary.

Impact

Companies will face one-time costs in switching to new systems and there could be some disruption of activity when the tax is introduced but many analysts expect the benefits from a single market to bolster the economy over the longer run. While designed to be revenue neutral, increased compliance could boost remittances to government coffers over time.

The promise of such a huge single market, along with a simplified tax structure, will likely attract more foreign direct investment into capital-starved India. The country is ranked 130 out of 190 in the ease of doing business by the World Bank and Modi wants to push Asia’s third-largest economy higher up the ladder.

Meanwhile, companies are racing to capitalize on the introduction with accounting firms such as Ernst & Young LLP pitching packages to manage the new system. Logistics companies stand to be among the biggest winners as it becomes easier to ferry goods across India while the country’s poorest states could also benefit as the removal of border levies make their low-cost regions even more attractive. Competition to attract business is set to intensify.

“Over time, we expect the elimination of cascading taxes and its simplified tax structure to boost productivity, lower costs, aid in the formalization of the economy and result in large revenue benefits for the government,” Varma said.

Source :  ET

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