India’s tax reforms

Just when things were starting to get normal in India post the banning of higher-denominated notes, the situation is seemingly getting jittery once again – this time with tax upheaval. Prime Minister Modi has taken the biggest reformist leap in its history with India’s long-awaited tax reform just over the weekend. On July 1, 2017, India introduced its country’s sweeping new Goods and Service Tax (GST), which has subsumed more than a dozen state and central levies into one tax, and a single market for the first time. The new tax system has four slabs of 4,12, 8, and 28 percent irrespective of the location of purchase.

Like with demonetization earlier in November 2016, the benefits are largely long term with many short term hiccups, glitches and disturbances, which is what the market is experiencing right now. While economists and experts are mostly agreeing to a single, nationwide tax that will streamline business, there are concerns about how the economy will transition to the new system. Tax processing and refunds under new GST will be done electronically, where businesses will have to align their existing systems with an online one.

On the positive side, India’s tax reforms will replace a bush of indirect state and central taxes, which will ultimately boost tax receipts and provide simplicity for businesses, and improve the ease of doing business. In the near term, the attempt will bring the informal economy in the tax net too.

However, the short term chaos includes implementation and adoption of technical infrastructure to handle large volume traffic. Also, experts and analysts also believe that while many big corporations have started moving ahead in an attempt to adapt to the new system, a key hurdle will be to change the mind-set and business practices of many smaller organisations. In general, many businesses are finding the new structure complicated because of the four tax slabs ranging from 5 percent to 28 percent, along with numerous exemptions.

Being touted as “One Nation, One Tax, One Market”, India’s new GST rates however are still among the highest in the world; and ideally India should work towards bringing them down to a single lower tax rate for all goods and services.