There are still a number of uncertainties and matters of debate surrounding the details of India’s proposed good and services tax (GST).
Perhaps most significantly, the rate at which the nationwide GST would be fixed has yet to be decided.
“Finance minister Arun Jaitley has stated that his preferred tax rate would be around 22 per cent, but some state assemblies have demanded that the GST be set as high as 27 per cent,” says Shilan Shah, the India economist at Capital Economics. He explains that could make it substantially higher than many similar taxes globally.
A parliamentary committee suggested a rate of 20 per cent.
Another area of concern is which goods should actually fall under GST.
“The biggest sticking point is the inclusion of alcohol and petroleum products, which account for over 30 per cent of tax revenues in a number of states,” says Mr Shah. “Jaitley has agreed in principle to exclude these goods from the GST if it means that a lower overall GST rate can be adopted. But while this may placate certain state assemblies, it will ultimately dilute the impact that the GST will have on raising revenues for central government.”
There have also been arguments raised by states over the amount of compensation they should receive from the central government for lost revenues that arise from the reform, he adds.
To come into effect, the reform would need the approval of at least half of the Indian states.
“The actual impact of the implementation of the unified tax regime on the economy cannot be gauged as several loose ends like the rate of tax, the efficacy with which the infrastructure and requisite technology for the collection of tax can be deployed, the formation of the committee for determining the tax rate and the awareness angle need to be tied up,” says Areef Patel, the vice chairman of Patel Integrated Logistics.
HSBC in a recent report highlighted that “over time the ideal form of the bill has been watered down by exemptions and a distortionary one per cent additional tax on interstate movement of goods”.
The bank also pointed out that a high rate of GST could impact inflation significantly.
There are, however, still clear benefits to the reform, which is widely supported by business leaders and investors.”
“GST legislation is probably the most awaited and high impact regulatory reform in India, in the past two decades,” says S Venkat, the founder and director of MyCFO, a financial implementation services company.
“The proposed GST law will have far reaching implications on Indian corporates, in terms of their tax costs, supply chain arrangements and working capital requirements. For foreign investors, GST will address their single biggest concern of doing business in India: complexity in tax laws.”
He explains that it would help investors to understand the tax costs they would incur in India.
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