India finally fires its big-bang tax bazooka

At the stroke of the midnight hour on Friday, India marked its historic transition to a new era of "one nation, one tax, one market" regime.

The roll-out of the new national Goods and Services Tax (GST) from today will go down as a landmark and game-changing tax reform.

In the 70 years of post-independence history of a nation of 1.3 billion people, there were only a few such watershed reforms that would have nation-wide implications, touching the lives and fortunes of all - the rich and the poor alike - as well as small and big businesses.

As the much-debated big-bang tax reform was launched at a special midnight session of the Parliament on the midnight of June 30, there also remains widespread confusion as well as apprehension over the impact of the GST on individuals and businesses as well as on the fate of the world's fastest growing economy.

No double taxation

From its roll-out today, taxes will be implemented more effectively since a network of indirect taxes like excise duty, service tax, central sales tax, value added tax and octroi will be replaced by one single tax. All of India's 29 states and Union Territories will still have a say in taxation, as the number of taxes will be reduced to three with Central GST, State GST and Integrated GST for inter-state dealings. As a result, consumers will not be subjected to the burden of double taxation. The final consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

With GST in force, the single comprehensive tax structure is expected to lead to the financial integration of India as Finance Minister Arun Jaitley has said. GST will replace at least 17 existing indirect taxes being levied by the centre and states. The administration of these taxes is often tangled in paperwork, resulting in slow inter-state movement of products and increased costs for consumers.

Boost to economy

Tax experts and economists estimate that by ensuring a comprehensive tax base with minimum exemptions, GST would not only help industry reap benefits of common procedures and claim credit for taxes paid but also boost the $2.3 billion economy by around two per cent. This will help reduce the budget deficit and facilitate the government to allocate more funds for development projects, while enhancing the allure of India as an investor-friendly destination for overseas companies.

However, critics of the new tax regime, which include Mamata Banerjee, Chief Minister of West Bengal, warn that GST would be a catastrophe, as a large section of small and medium businesses are still not prepared for the new tax regime.

Pankaj Mundra, co-founder and managing partner, Nimai Management Consultants, said it is for first time any good or service produced or rendered will have a clear end to end visibility and this would lead to lot of transparency and make any manipulations difficult if not impossible.

"This tax reform will certainly boost GDP by increasing tax collections.

It will also bring parallel trade to mainstream and help economy. This shall also help banks to know the real trade of a trader and hence better credit monitoring shall help bank to reduce NPAs (non performing assets).

This is also a great opportunity for NRI chartered accountants who want to migrate back to India as most of the SMEs will look forward to their CAs for guidance and support in preparation and implementation of micro-level GST in their businesses," said Mundra.

Less tax burden

James Mathew, group CEO (UAE & Oman) Horwath MAK, said GST in its broader purpose seems to be a welcome move, with simplification and transparency being the prime objective. GST implementation is targeted towards rationalising the current indirect tax regime and eradicating tax cascading.

"GST is likely to bring down overall tax burden on the consumer and inflation is expected to remain low as the essential goods have been exempted or have lower tax rates. It is anticipated that economy will be positively impacted in the medium term, with probable minor short term disruptions but attractive long term benefits outlook," said Mathew.  

"A well-designed GST is expected to simplify and rationalise the current indirect tax regime, hopefully, eliminate tax cascading - if it is really well coordinated and implemented in a strict manner, GST will definitely put the Indian economy on high-growth trajectory," said Anthony Peter, an Indian expat and Communications Director at Panasonic Middle East.

Joe Verghese, managing director, Colliers International India, said the implementation of the GST would increase final product prices of commercial and residential products even though it positively enhances India's attraction as an investment destination.

"The positive impact will be through the demonstration of the government's intent for delivering on its commitments of reform aimed at encouraging greater transparency and ease of operation across all sectors. The industrial property and warehousing segment will be the primary beneficiary of adoption of the GST system as operating efficiency is expected to increase."

In simple terms, GST is a single indirect tax for the whole nation, one which will make India a unified common market while simplifying the complex tax system that has been in existence since 1947.

As a single tax on the supply of goods and services, right from the manufacturer to the consumer, GST will break the complicated structure of separate central and state taxes which often overlap with each other to create a uniform consumption based tax system levied on the sale, manufacture and consumption of goods and services across India.

The GST Bill was introduced in Lok Saba in 2009 by the UPA government, but it was the NDA government got the law passed after introducing a slightly modified version of the reform proposal in the Parliament and both the Houses passed it.

GST rates

Under GST, the government has fixed GST rates on 1,211 goods and 500 services in the range of five to 28 per cent. Certain items such as alcohol, petrol, diesel and natural gas will be exempt under the GST.

In addition to these, the GST Council has also classified certain items under the 0 per cent tax rate, implying that GST will not be levied on them. This list includes items of daily use such as wheat, rice, milk, eggs, fresh vegetables, meat, fish, sindoor, bindi, stamps, judicial papers, printed books, newspapers, bangles, handloom, bones and horn cores, bone grist, bone meal, kajal, children's' picture, drawing or colouring books, human hair.

Some services such as education, healthcare, hotels and lodges with tariff below 1,000 rupees, grandfathering service have also been kept out of the GST purview. Rough precious and semi-precious stones will, however, attract GST rate of 0.25 per cent.

Impact on salaried employees

Since GST is applicable mainly for businesses it won't directly affect the salaried class and self-employed professionals such as doctors, lawyers etc. However, it will impact their expenses due to the change in rates of goods and services they avail. Other than that, they will continue to pay their income tax like before. The medical sector has been exempted from GST.

On businesses

The new tax regime will change the way businesses have operated until now. The elimination of multiple levies and creation of a single market with fewer tax rates and fewer tax exemptions will improve the ease of doing business and reduce avoidable litigation. It also untangles a complex web of taxes that businesses have been subjected to under the existing system. However, these advantages are only going to be visible in the long run, experts said.

Technology-driven

Experts point out that GST brings benefits to all the stakeholders of industry, government and the consumer. It will lower the cost of goods and services, give a boost to the economy and make the products and services globally competitive. On top of these, the new regime aims to remove the economic barriers, thus paving the way for an integrated economy at the national level.

The new tax regime is largely technology driven. It will reduce the human interface to a great extent and this will definitely lead to speedy decisions.

Source: Khaleej Times