The Indian Parliament passed the much-awaited Goods and Services Tax (GST) bill, and this new tax reform has been labelled as a historic one and India’s biggest tax reform since Independence.
As soon as the Goods and Service Tax bill cleared its way with a thumping majority in the Rajya Sabha, the India Inc. responded positively with several corporate heads stating that the passage of the bill would ‘ease’ doing business in the country. This bill would culminate with uniting India as one market, which otherwise was living in a legacy of almost 30 different markets within the country. We were saddled with a plethora of diverse state level taxes and levies of around 25-30% (less or even higher) in the case of some sectors. GST will ensure that India finally emerges as one common market with an approximate tax rate of around 18%, with no double taxation and no cascading effect of multiple levies. The passing of the GST Bill is a major turning point in India’s history, driven by the leadership of visionary Prime Minister Narendra Modi and Finance Minister Arun Jaitley.
GST will be an extremely good economic development for the country and has been underestimated. Firstly, it will add 1.50 to 2 percentage points to the gross domestic product (GDP) growth of the country. This higher growth will be displayed almost immediately from the April 1st. The reason being indirect tax evasion will almost come to an end because under the GST regime, it is not possible to evade taxes and get away with it. It is because of indirect tax evasion there is a lot of direct tax evasion in our country. Once the level of indirect tax evasion becomes minimal, direct tax evasion will also come down. This could boost Government revenues and in the long-run government could reduce the rates of the GST quite considerably. However, immediately there will be a relief of around 5 percentage points on taxation on FMCG. It will be similar on almost all goods that go directly to consumers. So, there will be a tremendous benefit. Consumption, production and investments into production will go up. Thus, this is a great development. I strongly believe that it is the biggest economic reform after the liberalisation of 1991.
The changes aim to streamline India’s fragmented tax system with a single levy. Indian businesses have been lobbying for the single tax rate as it would reduce costs, particularly for shipping goods across state borders. What is to be seen is the implementation of the world’s most complex tax reforms that is expected to be serviced by state-of-the-art technology. Indian software giant Infosys is building a gigantic electronic infrastructure – GST portal – where taxpayers can register, make payments and file returns. Somewhere around 7.5 million businesses will be covered by the tax. Clearly, a successful GST in India will be a minor miracle. The goal is to create a single market. Currently, everything sold in India is subject to a multitude of taxes varying from state to state. This is a bureaucratic burden, with a lot of money lost in a fragmented market. With every state deciding its own taxes it also encourages local protectionism. The new efficiency aims to boost growth, with optimistic estimates suggesting more than 2% of added economic growth. India already has overtaken China as the world’s fastest growing economy.
GST will replace that confusing muddle of existing taxes ranging from lottery and entertainment tax to VAT, sales tax or luxury tax with a single tax. There also will be no more taxes at the different state borders within the country. For example in current scenario, goods would be taxed six times, if brought from the northern city of Haryana to Chennai. The individual states fear they will lose money due to GST. But, now they will be compensated for their lost revenue over the next five years. Another compromise is that the lucrative businesses of fuel and alcohol have been entirely left out of the new tax for now.
The bill which has been a key goal of Prime Minister Narendra Modi easily passed the lower house, but was long held up in the upper house where Modi’s party – BJP, does not have a majority. Although the win in the upper house is labelled as a breakthrough, the actual tax is still not there as the states have to pass it as well.
The government’s target for the tax coming into effect is April 2017 but there is much doubt about it. It’s to be an electronic tax with no manual filing – the massive IT infrastructure will be an added challenge on the way to India’s tax miracle. There is no doubt about introduction of GST as a huge step by the government in backing its promise of ease of doing business. As a consumer e-commerce brand, our focus is on building a seamless supply chain and logistics network that helps us fulfil customer orders in different parts of the country. GST will help create a single unified market across India and allow free movement and supply of goods in every part of the country. Additionally, it will also eliminate the cascading effect of taxes on customers which will bring efficiency in product costs. Overall, GST is going to be a game changer for most industries.
Finally, GST has all the needed ingredients to be brilliant. One of the furthermost benefits of GST is that it is built ground-up as a technology-enabled-tax-system which allows for extraordinary traceability. Being technology-led, it has the potential to spiral upwards the trust deficit rather than spiral downwards. However, one of the major drawbacks or the most critical cause of potential failure of GST will be in the transference of responsibility of tax compliance and remittance to the customers to make them eligible for input credit. This would create trust deficit in businesses, extend credit cycles choking working capital and increase complexities in the businesses. The reasoning given by the Government here is that today people are colluding (albeit in small percentages) to fraudulently taking input credit when it is not due. It also reasons that because this is a small percentage, which will keep declining due to self-correction by citizens, it is not a ‘great burden’.
The ‘business risk’ is small enough to be manageable. With the framing of this law, the Government hopes that the market will self-weed out the bad eggs. While in theory this looks fine, but it does not understand the cascading consequences of doing this in practice and the mayhem it will create is an alarming concern. With the near ubiquity of Aadhaar, and the passage of the Aadhaar Bill, the Government must mandate that all GST registrations are traceable to individuals based on their Aadhaar identity. Now, the ability to repeatedly create phantom organisations which allow credit to be taken without correspondent payment will rapidly evaporate. And of course, the sheer traceability of the individuals and strong public actions showcased for deterrence, will now become effective.
