India moves closer to Goods and Services TaxThe long-awaited tax reform aimed at boosting economic growth and making India an easier place to do business looks set to become a reality.
A single Goods and Services Tax (GST) is India’s most keenly-awaited indirect tax reform. Since the newly elected Government assumed power in May 2014, work towards the introduction of GST has gained considerable momentum.
GST will streamline the country’s tax regime by consolidating a large number of indirect taxes imposed on transactions of goods and services at the central and state levels. These include customs duty, central excise duty, service treformax, state VAT and luxury tax, but exclude customs duty on imports. The reform is due to be rolled out by 1 April 2016.
Benefits of the new regime
GST will remove inter-state barriers and create a common national market. Being a simple tax on the value added at each stage of the production of goods or provision of services, it will eliminate the current system of cascading taxes and lower the tax burden for the final consumer. By setting-off input taxes in full, GST will help reduce the cost of manufactured goods and increase the competitiveness of exports as well. A more uniform, efficient and transparent tax structure, is expected to result in a wider tax base, reduce compliance costs and lead to higher tax collections. As a result, it is hoped that GST will boost India’s economic growth.
With foreign investments into India increasing, international investors are also keen on the long-awaited GST. The World Bank’s latest India Development Update (October 2014) cites the implementation of GST, combined with the dismantling of inter-state checkpoints, as the most crucial reform needed to improve India’s manufacturing competitiveness. The new tax will also support the Government’s ‘Make in India’ campaign aimed at making the country an attractive manufacturing destination for global businesses. [See Nexia Global Insight, October 2014]
India proposes to implement a ‘dual GST’ with a Central GST (CGST) levied by the Central Government and State GST (SGST) levied by the States. Until now, the intention was to introduce GST at central and state levels simultaneously. However, based on the latest discussions, it appears that the Government may first consolidate indirect taxes at the central level by implementing CGST, followed by the States introducing SGST. This two-step implementation should make it easier for State governments to move to SGST with an understanding of the challenges faced at the central level. The Government has also proposed introducing place of supply rules in order to meet the objective of shifting to a destination-based tax from the current origin-based tax.
Overcoming the hurdles
Although GST will greatly simplify India’s current indirect tax regime, there have been several hurdles in its implementation, the main one being the requirement for a constitutional amendment. The mechanism required for effectively administering GST is also likely to take a while to evolve.
A lack of consensus between the Central Government and the States over the design of GST and potential revenue losses has been a significant issue. Some States have raised concerns over the possible dilution of their fiscal powers and potential encroachment of their tax base by the Central Government. However, the Central Government has offered some reassurance to concerned State finance ministers by expressing its willingness to compensate States for their losses as far as possible.
Key for business
The implementation of GST will have a substantial impact on various key aspects of business, including finance and administration, sales and marketing, procurement, supply chain, working capital, cash flow and information technology. As a result, it is essential that businesses review the impact of GST on these areas to help prepare for implementation.
With significant progress being made since the 2014 general elections, the GST engine has restarted and it seems increasingly likely that it will become a reality in April 2016. This will be a major milestone in indirect tax reforms that will make doing business in India easier.
For more information, contact:
+91 22 6617 8100