India introduced its largest tax reform in 70 years since its independence from British colonial rule. The Goods and Services Tax (GST) unifies India’s economy into one of the world’s largest common markets. This tax will help reduce a plethora of federal and state levies, making it easier to do business with and within India by simplifying its tax structure.
While the GST will significantly reduce numerous levies, India will still have a more relatively complex tax structure. In contrast to similar sales taxes in other countries, India’s GST has four rates and numerous exemptions. However, it is certainly a step in the right direction, especially considering Modi’s dream of “One India, Great India.”
The GST and its effect on the economy will boost Prime Minister Narendra Modi’s economic qualities before a planned re-election bid in 2019. Modi was in need of improved economic credentials after the poor implementation of a decision Modi made late last year to outlaw 86 percent of the currency in circulation.
With repeated redrafts of the official schedule of rates, and constant obscurity considering how new this endeavor is, many businesses are nervous about how the changes will unfold. A major concern of smaller business is that they will need to pay the same rates as larger business, therefore paying higher tax rates compared to what they are currently paying.
Businesses that have Pan-India operations face filing digital returns a year, and in a country where many entrepreneurs are not computer literate, relying instead on handwritten ledgers. While adapting to technology is vital to future business endeavors, it is understandable how this adds to the difficulties regarding gaining support for this transition. One can argue it is better if entrepreneurs are required to become computer literate now, as opposed to later or never at all, and therefore this is a necessary evil.
With anticipated cause for celebration, Modi and President Pranab Mukherjee launched the new tax at the first midnight celebration in parliament’s central hall in two decades. While joined by cabinet colleagues, a former prime minister and major company executives, the launch was boycotted by several opposition parties. Most significant of all were the Congress Party, who had first proposed the tax reform, and former Prime Minister Manmohan Singh who is also known as the architect of India’s economic reforms.
While the tax reform certainly has its flaws, the main concern for why it may be unsuccessful is if the implementation is poor. Considering the large amount of criticism and incompliance, the GST is not likely to garner assistance in the case that it does not deliver on passing expectations. Despite its flaws, HSBC estimates the reform could add 0.4 percentage points to economic growth.
As the GST is a value added tax, firms will have an incentive to comply in order to take advantage of credit for taxes already paid. Furthermore, businesses are expected to save $14 billion in reduced logistics costs and efficiency gains, which should further convince companies to comply with the new sales tax reform.
Featured Image via Flickr/Foreign and Commonwealth Office’s photostream