India: India's GST: Are You Up To Speed?

Last Updated: 3 August 2017
Article by Shagun Kumar

The Goods and Services Tax (GST) – the biggest tax reform in independent India - was announced and came into effect on 1 July 2017. Here are the essential things you should know about India's GST.

It's one of the largest countries in the world by population, land mass - and, it seems, by financial complexity. India is a notoriously complex place to do business. There are multiple statutes governing taxation and foreign investment - the Foreign Exchange Management Act (FEMA), the Income Tax Act (ITA), Companies Act, tax laws of 29 states and seven union territories - plus in-depth custom guidelines for any import and export of goods and services in the country.

It's hard to be compliant in India, and it's that system that saw India named the world's 10th most complex country for business in TMF Group's inaugural Financial Complexity Index. The ranking of 94 jurisdictions across the world resulted in three top-10 spots for Asia Pacific: India at 10 was slightly less complex than Vietnam, ranked 5th, and China (7th).

In determining the rankings with our in-house accounting and tax experts, we used four weighted complexity parameters, considering the accounting and tax rules and regulations in different jurisdictions, and risks associated with non-compliance.

The rank was hardly surprising to those who know India. But that could all be about to change.

Prime Minister Narendra Modi - who swept to power in 2014 at the head of the Bharatiya Janata Party, the first single party to achieve a majority in parliament since 1984 - is pro-foreign investment, and his policies focus on privatisation and liberalisation of the economy. He's already liberalised foreign direct investment policies, streamlined labour laws, and introduced the Make in India, Digital India and Skill India initiatives to encourage foreign companies to invest in India.

The existing multi-layered tax system made it difficult to secure progress on the "ease of doing business" index. So, to reduce the complexity of state and central level taxes, the Goods and Services Tax (GST) – the biggest tax reform in independent India - was announced and came into effect on 1 July 2017.

The GST is a destination-based tax on the consumption of goods and services with the aim of achieving a "one nation, one tax regime" in India. It is a comprehensive indirect tax on the manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments.

And a quick internet search displays thousands of articles about how GST will impact on various industries, from automotive and multiplexes to the workload on civil servants. It's had the country in a spin since its announcement, and the jury is still out as to whether it will truly make a difference. Plus, it's not exactly "one tax": the GST rates range from 0% to 28% depending on various product categories. The four-tier GST slabs of 5%, 12%, 18% and 28% are set as lowest for essential items and highest for luxury goods and services. Plus, significant tax contributors such as alcohol, tobacco, firearms, petrol and electricity are being kept outside of GST for now. (A helpful list of rate slabs and what they cover can be found here.)

Still, there's no escaping it. Here are the essential things you should know about India's GST.

Uniformity will make compliance easier

Tax rates and structures will become more common across the country, increasing certainty and ease of doing business. Plus, the uniformity means India's investment in a robust and comprehensive IT system can bring taxpayer services such as registrations, returns and payments to the digital age - that gives greater transparency, greater control and easier compliance for businesses.

The GST is actually two taxes

As India is a federal country where both the centre and the states have power to levy and collect taxes, a dual GST is levied to keep up with the constitutional requirement of fiscal federalism. The GST is levied by the centre on intra-State supply of goods and services as the Central GST (CGST); the tax levied by states is the State GST (SGST). Integrated GST (IGST) is levied and administered by the centre on every inter-state supply of goods and services. So, it's still complex - just a little easier to understand and, perhaps, comply with than what came before.

It will shine a light on hidden costs

Removing the cascading of taxes and costs throughout the supply chain helps to remove the hidden costs of doing business in India. The old regime of cascades of taxes across state boundaries and throughout the value chain made it difficult to accurately gauge an end cost; the GST makes that value chain more transparent. Likewise, it's better for consumers; the old regime's overall tax burden on goods was estimated at 25-30%, though it's unclear exactly how much tax is in a final price paid. The Modi government has kept a large number of items under the 18% GST slab and the anti-profiteering legislation aims at passing the benefits to the end consumer.

Locally-made goods are more competitive

Major central and state taxes are eliminated in favour of the GST and the central sales tax is phased out which is a major boost to the Make in India initiative. This in fact reduces the cost of locally-manufactured goods and services, making them more competitive in the international market and giving an export boost.

It will help tackle corruption

This Bloomberg article looks at the various bribes and delays one trader faced trying to move goods across India, calling it a major barrier to economic growth. Lorry drivers in India lose 60% of transit time to roadblocks, tolls and other stoppages; each checkpoint is a new opportunity for corruption to bite. With the GST, state checkpoints will be eliminated resulting in easier cross-border movement.

The common market will be tough to beat

Introducing the GST and streamlining the tax system is the first step towards a common market in India; that's a common market of 1.3 billion consumers - a population greater than the US, Europe, Brazil, Mexico and Japan combined.

You need to be prepared

Businesses need to understand the framework of the GST and the likely impact it will have on their operations. While most businesses have actively sought advice on pricing strategy and supply chain impact, it is critical to ensure a focused implementation of the GST framework across departments, vendors and, of course, customers. Importantly, align your internal organisation and IT systems, and be ready for the change.

TMF Group is following the GST as it unfolds, and we have vast experience working with indirect tax in other countries. Our local experts are on hand to help you get up to speed with the GST, and make the most of doing business in India.

Read more about the Financial Complexity Index by downloading it here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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