GST in India... the good news

GST in India: Businesses, consumers stand to gain

India's unified tax, which will be set by the government, will do away with the labyrinth of state and federal taxes and is expected to boost economic growth by 2 per cent.
India's unified tax, which will be set by the government, will do away with the labyrinth of state and federal taxes and is expected to boost economic growth by 2 per cent.PHOTO: AGENCE FRANCE-PRESSE

Simplified system will eliminate numerous levies on goods, lessen burden on consumers and reduce scope for graft

Mr Lakhabhai M. Keshwala runs a brass parts manufacturing business and trucks his goods from his factory in Gujarat to exporters in Delhi, some 1,200 km away

The journey takes four days, held up by traffic jams and state border checkposts where drivers have to fill up forms and pay different state levies.

Mr Keshwala is hopeful that the trip to Delhi could be cut by a day when India's Goods and Services Tax (GST) is implemented next year, turning the country into a unified market.

For him, the biggest advantage of GST is tax collection going online

"So much time and money is currently spent on running around different offices from sales to excise to VAT. On top of that there's also corruption," said Mr Keshwala, whose company Satyanam Engineering Industries has an annual turnover of 25 million rupees (S$508,000) and is one of 6,000 brass businesses in the Jamnagar district in Gujarat.

In India, small and medium size enterprises are seen as key drivers of manufacturing growth.

Experts believe the introduction of GST will benefit them the most in the long term once they adjust to the new online system.

India currently has a complex tax structure with each of its 29 states fixing their own tax rates. There are over a dozen different taxes, ranging from federal sales tax, local sales tax to excise and Customs, resulting in 20 to 40 per cent levies slapped on products. Ingrained corruption also sees businesses often paying bribes to get tax approvals.

The unified tax, which will be set by the government, will do away with the labyrinth of state and federal taxes and is expected to boost economic growth by 2 per cent, a key reason the Indian government pushed the tax Bill through Parliament in the face of tough political opposition. Prime Minister Narendra Modi came to power on the back of promises to boost growth and create jobs.

GST is expected to boost manufacturing, ease the movement of goods across state borders, improve tax collection, reduce the scope for corruption and increase revenues.

It is also expected to make India - ranked 130 out of 189 countries in the World Bank's ease of doing business index - a far more attractive destination for foreign investors

Mr Frederico Gil Sander, the World Bank's senior country economist for India, noted: "Lower taxation of capital goods and exports will boost growth directly, while fewer inter-state barriers will boost productivity."

India is the world's fastest growing economy with GDP growth at 7.6 per cent in the last fiscal year even though bureaucratic red tape, problems of land acquisition and antiquated labour laws remain impediments to higher growth. And it has some way more to go.

As Singapore's Deputy Prime Minister Tharman Shanmugaratnam noted in an inaugural lecture in a series on "Transforming India" in Delhi last month, even if India chalks up 8 to 10 per cent growth a year while China slows down, the South Asian giant will have just 70 per cent the level of per capita income of China in 20 years' time.

Manufacturing rose to 9.3 per cent in the 2015-2016 fiscal year from 5.5 per cent in the previous one, but experts noted the base was so low that the sector would have to grow much faster to have real economic impact. The farm sector was the slowest at 1.2 per cent while the services sector grew at about 8.8 per cent.

A Confederation of Indian Industry report said that having a GST regime would lighten the tax burden on consumers, thereby facilitating consumption-led growth. On the business side, a GST regime would encourage small firms to scale up.

Ms Neeru Sharma, who runs a small business making paper rolls for ATMs and computer stationery, has kept her business in and around Delhi to avoid tax complications.

She also does not do business beyond 15 million rupees so as not to attract excise duty and erode profits.

Ms Sharma reckons that once GST is implemented, it would be easier to scale up as she would just have to pay just one standard rate.

"I am not saying GST will solve my problems or bring down my tax liability but I can do business in any corner of India. I don't have to worry about getting stuck on some tax complications."

She added: "But GST has to be implemented well. There should be no ifs and buts."

A version of this article appeared in the print edition of The Straits Times on September 26, 2016, with the headline 'Businesses, consumers stand to gain'. Print Edition | Subscribe