In the World Bank’s latest Ease of Doing Business ranking, India jumped 30 places to break into the top 100 countries, reinforcing the Modi government’s image of being committed to sustained business reforms. These rankings are expected to improve further in this year’s update, due in October, when goods and services tax (GST) reform is factored in.

Under the erstwhile complex indirect tax system, businesses faced prolonged tax disputes and harassment from revenue officials and this acted as a dampener on investor sentiment. Few believed until recently that India could implement as bold a reform as the GST reform.

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Before GST, India’s indirect tax structure was a mess, with separate event-based taxes on manufacture, services, sales, entertainment and so on. This structure had become outdated and suffered from several defects, such as tax cascading, interface with multiple tax officials and complex compliances, to name a few. GST has sought to correct these defects and align India with the globally prevalent value added tax.

Global principles

GST is based on the same principles that exist in the EU, China, south-east Asia and so on, and its importance cannot be exaggerated. Introduced in July 2017, one national GST has subsumed several taxes with one set of tax rates and rules applicable throughout the country. It makes India truly a single market and helps business decisions such as site location and supply chain strategy to be based purely on business logic rather than be tax dependent. The GST also eliminates major areas of tax litigation such as works contracts, classification, taxation of software and intangibles.

Hailed as the biggest reform in independent India, the GST reform is set to give FDI a big boost. Before GST, trucks waited in huge jams at state checkposts – often for days – for officials to inspect and verify goods and tax documents. GST has eliminated these checkposts, giving a huge fillip to the logistics sector. Reduction in transport intervals has also strengthened the perishables, medicine and chemical sectors. As the law evolves, easing out processes, businesses can really focus on doing what they do best: doing business, and not get embroiled in ambiguous provisions and whims of the taxman.

So has GST really proved to be the panacea for all India’s tax ills? It was anticipated that a reform of this magnitude, especially given the hurried manner it was brought in, would face opposition and implementation challenges. One must bear in mind that India is a democracy (with a cacophonous media) where the government’s pulse is synchronous with the volatility of public opinion.

One mistake by the government, in hindsight, was to make GST heavily technologically dependent. This backfired initially when servers faced downtime, businesses complained of lack of preparation and many convoluted provisions had to be put in abeyance. Credit is due to the government for effective fire-fighting and easing pressures when needed.

Reaching stability

After almost a year, GST is now moving towards stabilisation with businesses getting familiar with compliances and government revenues shoring up. Recently, the government has announced several anti-evasion measures and a new compliance design (hopefully more workable technologically than before).

The big criticisms of GST are that it is not the utopia it could have been, that it is plagued with multiple rates (six in all), complex rules and red tape. The government’s logic is that footwear and luxury cars cannot be taxed at one rate. There is a case to be empathetic with a government that has, at least, shown the courage to be bold when there is hardly an example of a government returning to power after implementing GST.

Malaysia is a latest example of the political incumbent losing elections and the new government abolishing GST. Thankfully, there is no sign of this happening in India since the polity is too mature for any sort of backsliding. Despite the problems, GST has turned a new leaf in India’s journey towards making things easier for business and foreign investment. Things can only get better from here.

Jigar Doshi is a partner with a focus on indirect taxation at Mumbai-based SKP Consulting.