India’s biggest tax reform since independence in 1947 looks all set to make the world’s fastest-growing major economy an easier place to do business. The Goods and Services Tax (GST) could also create a single market with a population bigger than the US, Europe, Brazil, Mexico and Japan combined.
Currently, at least 17 different state and federal taxes are gazing at any company wishing to sell its wares across India’s largely informal $2tn-plus economy. With the introduction of the long-awaited “one nation, one tax” GST, that number is about to drop to just one from July 1.
The official GST rates have slotted more than 1,200 items into five tax brackets between zero and 28%. Staples such as food grains, fresh vegetables and milk are not taxed at all, while education and health services will continue to be exempted.
With tax rates generally seen as moderate and lower-than-expected, India should be able to roll out the reform without a politically damaging rise in inflation.
The GST could boost economic growth by as much as 2 percentage points, says Finance Minister Arun Jaitley. GST adoption would likely see India’s medium-term GDP growth above 8%, according to the International Monetary Fund (IMF). At around 17.5%, India’s tax revenue-to-GDP ratio remains considerably lower than its emerging market peers, says the IMF.
In a country in which fewer than 1% pay income tax, the GST could broaden India’s tax base. And greater tax compliance could boost revenues for the government, helping narrow Asia’s widest budget deficit and allowing more funds to be allocated to core infrastructure.
Driven by GST optimism, consumer-goods companies extended a rally in Indian stocks on Monday as the benchmark Sensex ended near its all-time closing high. Overseas investors have purchased more than $7bn of local stocks through May 18 this year.
There are some complaints, though, amid divergent rates and multiple exemptions. Some economists and analysts see a July 1st deadline as unrealistic, saying less than 10 months after demonetisation, India’s economy could again be upturned as companies struggle to comply with the new tax code. Business groups, facing an overhaul of their tax systems (accounting firms await a windfall, for sure!) have lobbied the government for a September 1 roll out. Their argument: companies – particularly small-and-medium-sized enterprises that contribute more than 30% of India’s GDP – need more time for GST compliance.
India is all set to join the larger league of 160 nations that have a value-added tax. At the top bracket, GST will be among the highest. And with 29 states, 22 official languages, 9mn businesses and 1.3bn consumers, the logistics of overhauling India’s tax system are likely to make any tax changes by US President Donald Trump pale in comparison.
The sweeping tax reform will gradually reshape India’s business landscape. More importantly, widening the tax net means India could spend more on desperately needed infrastructure and training programmes for a workforce that is growing by 1mn people each month.
With GST, India’s groundwork for longer-term growth looks solid.
