With the Rajya Sabha passing the Constitution Amendment Bill that will enable implementation of the Goods and Services Tax (GST), the doors have been flung open for the biggest indirect tax reform measure since Independence.
The introduction of the GST will be a game-changer. It will simplify India’s indirect tax regime by replacing at least 17 federal and state taxes with a single, uniform tax, thus eliminating the inefficiencies created by a multiplicity of taxes, cascading effect of taxation and complex filing requirements.
Replacing indirect taxes such as value-added tax, excise duty, service tax, central sales tax, additional customs duty and special additional duty of customs with a unified GST will bring India’s indirect tax regime at par with developed economies.
GST will significantly facilitate ease of doing business in India, boost the government’s ‘Make in India’ program and improve our global competitiveness.
GST IMPACT ON INDIAN ECONOMY
The overarching objectives of the GST are to ensure the availability of input credit across the value chain, simplify tax administration, harmonise tax laws across the country, increase the tax base and raise compliance. By significantly reducing the cost of tax compliance it is expected to reduce evasion and help generate higher tax revenue.
Importantly, GST will transform India a new common market that has more states than the European Union has members, and twice the population of North America, as observed by Bloomberg.
A stable, transparent and predictable tax regime will also encourage local and foreign investment in India, helping create significant job opportunities and add 1%-2% to India’s GDP growth, according to estimates by the National Council of Applied Economic Research (NCAER).
The tendency of successive governments in India to continuously increase indirect tax rates has led to a distorted tax regime wherein our country has one of the lowest direct tax-to-GDP ratios in the world. India’s indirect-to-direct tax ratio stands at 65:35 compared to the average 35:65 ratio of most other countries. By limiting the powers of governments to levy inordinately high indirect taxes, the GST can help correct this skew.
The common man stands to gain as manufacturers are likely to pass on the benefits of economies of scale in production and efficiency in supply chain that will accrue from the levy of GST. Consumers today pay about 25%-26% more than the cost of production for manufactured consumer goods under the current tax regime.
If the revenue neutral rate of GST is set around 17-18%, manufactured goods will become cheaper. On the other hand, services are likely to become expensive as the effective service tax at present is 15%. The two are likely to offset each other so that the net impact on inflation will be benign in the longer term.
The studies show that standard GST rate in most countries ranges between 15% and 20%. In India a GST rate between 18%-20% which is likely to be will probably minimise the inflationary impact. While many state governments are lobbying to set the GST rate higher, it should be noted that the NDA government has made an important concession in agreeing to a full five-year compensation to the states for possible loss of revenues.
THE CHALLENGE OF IMPLEMENTING GST
A strong IT backbone will be crucial in ensuring the successful rollout of GST. A non-profit entity, the Goods and Services Tax Network (GSTN), was incorporated in 2013 with the objective of creating the IT infrastructure needed to implement the GST. GSTN will connect the databases of 29 states and 7 Union Territories with the Centre to enable registration, return filing and payment services to tax payers across India. However, the challenge lies in integrating and streamlining the many tax administrations as technology capabilities vary across states - some big states have sophisticated systems but smaller states have very rudimentary ones. The GST portal also has to provide a simple front-end for trade and industry to file tax returns and pay taxes.
More crucially, proper training will have to be imparted to GST administration staff both at central and state levels in terms of the concept, legislation and procedure as this new tax differs significantly from the existing indirect taxation system in the country.
E-COMMERCE MUST BE ADDRESSED EFFECTIVELY
The e-commerce industry is expected to form the largest part of the Indian Internet market with a value of about US$100 billion by 2020. The rapid growth of e-commerce is not only transforming and revolutionizing the Indian retail landscape, it is also encouraging the setting up of scores of micro, small and medium enterprises (MSMEs) and generating employment on a large scale. It is imperative, therefore, the GST enables e-commerce in India and not hobbles it.
The proposed TDS for e-commerce, as an exception to the implementation of GST adds to the complexity and may hamper the growth of this sector. Hence, there is a need to articulate unambiguous GST rules that are uniformly interpreted and implemented across the country, across sectors. GST should enhance operational efficiency of the e-commerce industry through transparency, simplification of taxes and improvement in supply chain efficiency. The law should be flexible enough to keep pace with the evolving business model of e-commerce companies.
THE ROAD AHEAD
We expect the GST to benefit the pharmaceutical industry through the rationalization of the tax structure and optimizing distribution. Any reduction in production or distribution cost will significantly enable the industry to pass on the benefits to the patients.
It has been a tortuous decade-long journey for the GST as bitter political wrangling had stymied previous attempts to make this much-needed reform a reality.
I sincerely hope that the passage of the Constitutional Amendment Bill in the Rajya Sabha will hasten up the legal process to implement GST in India and the state governments will act swiftly to ratify the legislation.
The multiple stakeholders including the political class should align to look at this as an evolutionary reform and must not hold up the implementation worrying about the nitty-gritty of the GST to be perfected. Issues can be ironed out and the GST can be fine-tuned over time. The focus should now squarely be on the implementation of GST at the earliest.