If all goes according to plan, India will introduce a Goods and Services Tax (GST) on 1 July this year. This is a hugely “big deal”, and could have enormous benefits for India, simplifying a wide range of other taxes and greatly assisting in the integration of the still somewhat separate state economies within India.
EY recently suggested that the new tax “will lead to business transformation for all major industries”. They noted that the GST would “replace the current Central taxes and duties such as Excise Duty, Service Tax, Countervailing Duty (CVD), Special Additional Duty of Customs (SAD), central charges and cesses and local state taxes, i.e., Value Added Tax (VAT), Central Sales Tax (CST), Octroi, Entry Tax, Purchase Tax, Luxury Tax, Taxes on lottery, betting and gambling, state cesses and surcharges and Entertainment tax (other than the tax levied by the local bodies).”
That indeed sounds like a giant leap forward in terms of streamlining the Indian tax system, and it would seem churlish to criticize it.
But what could have been a giant leap forward seems likely to be good deal less than it could have been. What has been agreed seems likely to lead to enormous complexity, both for those in government trying to police the tax and for those in the business sector trying to comply with the new law.
Instead of applying a single rate of GST to virtually everything, as we do in New Zealand, there will effectively be five rates of GST – some goods and services will be exempt from GST; “essential supplies” will be taxed at 5%; there will be two different “standard rates”, 12% and 18%; and a rate of 28% for goods currently taxed at more than 30%.
There will, in addition, be another tax levied on specified luxury and “sin goods”. Petroleum products will, at least for the moment, remain outside the GST net, as will alcohol.
Unsurprisingly, there has been intense lobbying by many industries to be included at a low rate of GST, with the jewellery sector, for example, arguing that their sales should be subject to a GST of just 1.25% and the textile sector pushing for a 5% rate.
The new tax will have two components – “Central GST” levied by the federal government and “State GST” levied and collected by the states – and at this stage I at least remain unclear how that will work.
Interestingly, the law provides that input tax credit will only be available on a provisional basis for a period of two months until payment of tax and filing of a valid return by the supplier. It appears that there will be a major effort to match the claims for input tax credit with the payment of tax by suppliers, with input tax credit “reversed” in case of a mis-match. I hope that this “matching” effort occurs on a sample basis – with severe penalties for false claims – and does not apply to every single transaction. If it is envisaged that it will occur for every single claim for input tax credit, even the millions of people already employed in enforcing taxes in India will be insufficient for the task!
Surprisingly, in searching for information about the Indian GST online I was unable to find any reference to a “cash option”, allowing small businesses to file their GST returns on the basis of amounts actually received for sales and amounts actually paid for inputs, rather than doing both sales and purchases on an accrual basis. For small businesses, which typically do not employ full-time accounting staff, having the option to file their GST returns on a cash basis is extremely important, and results in vastly lower compliance costs (and the only loss of revenue is to the accounting profession!). I hope that that option does exist.
In short, it is not yet clear that the introduction of GST in India will be the enormous benefit it could have been. All of us who want India to succeed must hope that it works well. Whether it can be successfully introduced by 1 July must remain a very open question.
Copyright © 2024 Don Brash.