On September 8, the President approved an amendment to the Indian constitution to allow for the implementation of the Goods and Services Tax (GST). The Government is aiming for full implementation of the GST on the 1st of April 2017. Moreover, on September 12, the Indian cabinet announced the creation of the GST council which will recommend the rate at which the standard GST will be set and which items will be included in it. The council will be headed by the Union Finance Minister and include State Finance Ministers.
The GST is heralded as the biggest tax reform since independence, reforming the Indian taxation system through implementing a single tax on the supply of goods and services, replacing all the direct and indirect taxes currently implemented by the central Government and States. Overall, it is expected that the GST will have far reaching implications on businesses and production in India through changing India’s tax: structure, incidence, computation, payments, compliance, credit utilization and reporting. It is expected that this tax reform will increase economic growth rates and will broadly have beneficial impacts on the Indian economy through supporting the development of a common Indian market, reductions in logistics and transaction costs, improving compliance and broadening the tax base, and reducing the cascading effect of tax on the cost of goods and services.
There is significant debate across the political spectrum at what standard rate the GST should be set and which items to include and exclude. The opposition parties are advocating for a rate below the generally proposed 18 percent while some States are proposing to set it at 20 percent to ensure adequate revenue collection. A report for the Government on how to ensure neutral revenue rates after GST implementation recommends a standard GST rate of 17- 19 percent for most goods and services, a 12 percent rate for some goods (including most agricultural goods) and a 40 percent rate for luxury goods.
Multiple actors have highlighted that the GST will facilitate and significantly increase the trade of goods and services within India. For instance, trade bodies in Bihar recently welcomed the ratification of the GST highlighting that it likely to increase country wide trade and State tax revenues. Trade is expected to increase as the GST will eliminate the current multitude of taxes, duties and surcharges that exist between States thereby effectively creating a common Indian market. This will allow goods and services to move across State borders without the current checks or duties. For instance, successful GST implementation is expected to eliminate the queues of trucks waiting at state boundaries. Indian businesses are generally supportive of the GST as it is expected to simplify their value chains.
A report by the National Institute of Agricultural Marketing investigates the implications of the GST on the National Agricultural Market (NAM) (the establishment of which was covered in a previous blog on the India Food Security Portal), an initiative to integrate regulated food markets across the country through a digital platform. As discussed previously, the NAM would allow farmers and traders to trade agricultural products with anyone in the country allowing them to receive the best price for their produce. The report predicts that the implementation of the GST will further facilitate NAM and benefit Indian agriculture by facilitating agricultural trade between States through elimination of the various taxes. This is also expected to reduce post-harvest losses as perishable products are able to access markets faster.
By: Bas Paris