Have faith in India's new tax system

At the stroke of midnight on Aug 15, 1947, India made its deal with destiny, upon its declaration as an independent and sovereign republic.

Nearly 70 years later and again at the stroke of midnight, India implemented its most vital tax reform, the Goods and Services Tax (GST), on July 1.

The GST is significant in how it embodies the principle of "one nation one tax", which is aimed at ending the complex web of indirect taxes, putting them into one blanket tax net.

The roll-out of the new tax marks a massive exercise in fiscal federalism essentially converting an economy of more than 1.2 billion consumers, 29 states, 22 official languages, nine million businesses into a single unified market.

WHAT DOES THE RATE CARD LOOK LIKE?

The Indian government has firmed up the rates for 1,211 goods and 36 services under the GST.

It follows a multi-tier rate structure with an aim to significantly reduce prices for a vast majority of mass consumption items, including certain industrial inputs and capital goods, which should give a push to both consumption and investment demand in the economy.

For goods: The multi-tier GST rates are 5 per cent, 12 per cent, 18 per cent and 28 per cent with a nil or zero rated category. Nearly 50 per cent of goods have been placed under the 18 per cent rate; 14 per cent under 5 per cent rate; 17 per cent under 12 per cent rate and 19 per cent under the 28 per cent rate.

For services: Besides the exempted category of services, which include healthcare and education, all other services have been categorised into four different rates of 5 per cent, 12 per cent, the standard rate of 18 per cent, and the luxury rate of 28 per cent.

ANTI-PROFITEERING MEASURES

There are also anti-profiteering rules, which mandate that any benefit arising either from lower tax rates or more tax credits being available in the new GST regime should be passed on to the consumer by way of a reduction in prices.

Recent introduction of anti-profiteering rules were seen in Australia during its GST introduction in 2000, followed by Malaysia in 2015.

Though there are no empirical studies to prove its effectiveness, the Indian government appears to be inclined to experiment with these provisions.

Singapore, on the other hand, adopted a more pragmatic approach by monitoring prices before and after the introduction of GST, urging consumers to boycott profiteers when it introduced the GST in 1994.

INDIA'S GST VS GLOBAL PRACTICES

In its current form, India's GST is demanding and has numerous provisions that are distinct from globally established GST principles, including the following:

Multi-tier rate structure: India has adopted a multi-tier tax rate structure for goods as well as for services, against the recommended best practices of keeping the number of rates low.

Threshold exemption: The GST registration threshold in India is set at 20 lakh rupees (about S$43,000), which brings many small and medium enterprises into the GST system.

This is expected to be challenging for such businesses which may not have the sophistication of larger businesses to meet the GST accounting requirements.

Returns: India's GST will be a constitution of Central (Federal) and State, which means that registered taxpayers are likely to file monthly GST returns (three returns - GSTR-1, GSTR-2 and GSTR-3) and an annual return in each state from where such a taxpayer is carrying on his business operations.

Reverse charge: This is generally applied to inbound services from abroad; however, in India, it would apply to both goods and services.

Given the complexity of the new rules, it is easy to criticise its imperfections and/or highlight uncertainties of some of its rules. The pragmatic approach is to accept that the GST is here to stay and policymakers and businesses have to work together to make GST a Good and Successful Tax.

Even with its flaws, the GST roll-out is expected to bring benefits, especially through the creation of a single market, its long-term contributions to the gross domestic product and facilitating greater ease in doing business in India.

It is time for all the stakeholders to stay committed and walk the journey with a steady pace together, realising that Delhi wasn't built in a day.

The writers are from PwC Singapore. Koh Soo How is the Asia-Pacific indirect taxes leader and Abhishek Shukla is deputy head of the India desk. This is an edited version of their article that appeared in The Business Times yesterday.