The challenge is intimidating when an economy of more than 1 billion consumers and 9 million businesses – all functioning beneath an umbrella of taxes, esoteric regulations and rival political ambitions, is converted into an integrated common market. But that’s the goal as India gets ready to roll out a goods and services tax (GST) after a 10-year battle to win over the country’s powerful states and fractious federal parties. Designed to nurture tax compliance, the GST is scheduled to go into effect on 1st July 2017 to make it easier to do business in the world’s fastest growing major economy.
Let’s have a look at the challenges and potential rewards from the country’s biggest ever tax reform.
India’s population of 1.3 billion is more than that of US, Europe, Canada and Australia combined and more states than the European Union’s 28 members. From the powerful Uttar Pradesh with the Brazil’s population size, to the tiny seaside region of Goa, India’s states presently set their own taxes and charge duties. The GST will clear away those taxes and duties and complement the indirect tax system across the nation.
It took 10 years for India to get through the GST. In order to set up a network that can handle invoices worth `3,600 crore a year, the government is putting aside about `2,800 crore over five years and is training more than 61,000 government officials to manage it. Indian software giant Infosys Ltd, will provide the digital backbone to handle 55,000 users concurrently.
To compensate states for any loss in revenues, collections at the higher rate will go to a fund which will be used by the federal government. India will be joining 160 countries that have a value-added tax, including Poland, Canada and Japan. India’s GST will be among the highest.
Businesses will confront one-time costs in switching to new systems and there could be some disruption of activity when the tax is introduced. But benefits can be expected from a single market to reinforce the economy over the longer run. While designed to be revenue neutral, increased compliance could boost remittances to government funds over time.
The potential of such a huge market, along with a simplified tax structure entice more foreign direct investment into capital-starved India. The country is ranked 130 out of 190 in the ease of doing business by the World Bank and this leads to Indian economy being Asia’s third-largest economy higher up the ladder.