India is finally set for the launch of the much-awaited national sales tax on July 1 to boost economic growth and state revenues with the federal and state governments ready to roll out the Goods and Services Tax (GST).
Over a decade in the making, the “one nation, one tax” GST promises to subsume India’s plethora of local and national levies into a single payment, thus unifying the country’s 29 states and at least 17 state and federal levies into a common tax regime.
To be sure, few countries are fiddlier than India when it comes to paying taxes; the World Bank ranks it 157th out of 189 for simplicity. Both the central government and powerful state legislatures impose a bewildering list of charges. For example, car sales are liable to six different levies at various rates.
The rates differ between states, thus making stuff in one and selling it in another is often harder within India than it is in trade blocs such as Nafta (The North American Free Trade Agreement) or the European Union.
That should change with the GST.
The new tax would apply to goods at the point of consumption rather than production with a multi-tier regime. Most goods will be taxed at standard rates of 12% and 18%. Two more rates of 5% and 28% have been decided for implementation.
Finance Minister Arun Jaitley has said a zero tax rate will apply to 50% of items in the retail inflation basket to protect consumers from price rises on essential goods such as food grains. Tobacco products will continue to be taxed at 65% and luxury goods will also be taxed at a higher rate.
Sure, there will be winners and losers determined by what exemptions are included in the GST fine print. But companies will have to overhaul their accounting systems, which may involve one-time investment. Revenue secretary Hasmukh Adhia has warned that firms should not count on a postponement of the GST rollout.
The GST could boost economic growth by as much as 2 percentage points, according to Jaitley. Greater tax compliance is likely to boost revenues for the government, helping narrow Asia’s widest budget deficit and allowing more funds to be allocated to schools and highways. Countries like Canada, Australia and New Zealand saw a one-time increase in inflation after GST implementation, which normalised in a year, say Citigroup economists.
Queues of trucks now idle at India’s state boundaries much in the same way they do at international borders. But with multiple tax checkpoints set to be dismantled soon, businesses are thrilled at the idea of being able to distribute their products from a single warehouse, rather than replicating supply chains in each state.
India’s most ambitious tax reform since independence is set to transform its $2tn-plus economy and a market of 1.3bn consumers (about four times the US population) into a single economic zone with common indirect taxes – something that neither the EU nor the US can boast.
