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India’s new Goods and Services Tax has the potential to boost economic growth, but is a headache for retailers. Sophie Drouliscos reports.

India’s recently-implemented Goods and Services Tax (GST), hailed as the country’s most significant tax reform since its independence in 1947, has resulted in disarray across the country as retailers struggle with its implementation.

The overhaul, which aims to cut red tape, boost tax revenues and increase economic competitiveness, replaces a complex system of 23 levies and 17 indirect taxes with one of four GST rates on nearly all goods and services: 5%, 12%, 18% or 28%. Certain items in the highest tax bracket, such as luxury cars, cigarettes and carbonated drinks, are subjected to additional levies; items such as eggs and milk, however, are exempt. India’s finance ministry estimates the reform will increase economic growth by 2%.  

Prior to the GST, retailers were accustomed to a rather loose system of regulation. Much of India’s economy is informal and cash-based and has historically operated outside the tax net, so implementing the GST in a uniform manner was bound to cause disruption.

The reform has led to widespread confusion, with many small businesses saying that simply increasing the previous VAT rate would have been more sensible. Specifically, the implementation of the GST has ushered in administrative and logistical problems, including deliveries to shops going awry and tax returns becoming more difficult to file. Registering with the GST network also requires a computer, which many businesses do not have.

“In a large, diverse country like India, there will always be challenges when such a disruptive reform of such a high magnitude takes place,” notes Trividesh Singh Maini, policy analyst at the Jindal School of International Affairs. “People have taken time to comprehend the exact meaning of this reform, and are in the process of getting conversant.”

Mr Maini says that a tax overhaul was due in India, owing to the inequality between the country’s states. 

“This was needed because, despite being one country, the barriers to trade within states were immensely high,” he says. “There were numerous taxes, and the layering effects caused an inflationary effect. A vast majority of the economy was untaxed, because India is still, in various forms, an informal economy. We are at the early stages of formalisation and development.”

In terms of benefits, India’s minister for road transport, highways and shipping, Nitin Gadkari, has stated that the infrastructure sector and India’s transport logistics are set to gain the most from the GST, predicting a 20% fall in costs. For example, with the GST, interstate checkpoints will no longer be necessary, reducing costs and facilitating the interstate delivery of goods.

Regarding the time-frame within which India can be expected to reap any benefits, the outlook is mixed. In the short term, the reform should formalise more of India’s untaxed economy, but the noticeable benefits may realistically take years, experts say. 

This article is sourced from fDi Magazine
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