India gears up to roll out GST

Bloomberg

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 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. Narendra Modi’s government says introduction of the tax may bolster growth by as much as 2 percentage points.
Finance Minister Arun Jaitley said at the weekend that the tax reform could see India grow at more than 8 percent while a recent research paper from the Federal Reserve said the change could boost real GDP by as much as 4.2 percent, depending upon how high the tax rates are. The lower the rates, the bigger the boost, the paper said.
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 US, Europe, Canada and Australia combined and more states than 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.
President Donald Trump is girding for a political battle to overhaul the US 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.
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% 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% rate while processed foods will be charged 12%. Household goods like soaps, toothpaste, and smartphones are likely to be in 18% bracket while other durable goods such as air conditioners will attract 28% duties. Luxury goods 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 federal government to compensate states for any loss in revenues. Critics have argued that multi-layered tax system is too complex but compromises had be be struck to get 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 US has always resisted a national sales tax.
While some fear 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.