It may be the world’s most ambitious tax reform.
India’s famously convoluted indirect tax system is finally being overhauled. That means fewer headaches for Indian businesses – and a wealth of opportunity for accountants.
If you think the UK’s tax system is complicated, spare a thought for businesses and their accountants in India. India’s 29 states have their own indirect tax systems, including excise, services tax, VAT, luxury taxes and additional customs duty. On top of this, the tax rates differ from state to state. A business in India that sells goods or services in different states faces as much paperwork as if it were selling to different countries. Federal tax must also be taken into account.
Ineed, India’s indirect tax system has become even more complicated since the mid-1950s, when central excise duty was introduced. Car sales are liable to six different levies at different rates, The Economist notes.
And a report by the World Bank and PwC ranks India’s tax system 157th out of 189 economies for simplicity. But, after decades of grumbling about the indirect tax system (and plans to simplify it), things may finally be about to change for the better. The Indian government aims to introduce a national goods and services tax (GST) on virtually all goods and services by April 2017. It’s part of prime minister Narendra Modi’s plan to reduce bureaucracy and corruption.
According to EY, the introduction of a single indirect tax will be a “gamechanging reform” for India’s economy. It will create a common Indian market, cut tax costs for businesses and make tax collection more efficient. In fact, some economists reckon the GST will boost India’s gross domestic product. The tax will affect almost all aspects of business operations in the country: prices for products and services, supply chains, and accounting and tax software.
However, the GST rate hasn’t been finalised. Having a standard GST rate in India will help companies to “rejig” their supply chains, which are currently structured to take advantage of “tax arbitrage”, says Sachin Menon, partner and national head of indirect tax at KPMG in India. India will at last have a uniform tax system, with a reduced tax for manufacturing, which will make its economy more competitive, he says.
The preparations for the new tax will create more opportunities for accountants. “There will be teething troubles with implementation. Businesses will have to look again at their entire business structure, and change the levers to optimise their business model,” Menon says. “There is a tremendous opportunity for professionals such as accountants to help industries get ready for the change.”
Long time coming
So why has it taken so long to simplify India’s indirect tax rules? One reason is that governments have lacked a sufficiently large majority to steer the legislation through parliament. The Bill was passed by the Lok Sabha, the lower house of the Indian parliament, last year. It then became stuck in the upper house of parliament, the Rajya Sabha, where Modi’s party, the Bharatiya Janata Party, does not have a majority, before being passed in August this year.
Not all of India’s states embraced the changes either, as they perceived that their fiscal powers would be curbed. Menon says that the majority of states came to support the GST partly because, as “net consumer” states, the new tax will increase their tax revenue. “The net exporting states will be compensated for loss of revenue for the next five years and the industries are wholeheartedly supporting the GST. Hence, it is a win-win situation for all stakeholders.” This is the GST’s best chance of becoming a reality in 12 years, but, with the debate on the rate of GST dragging on, Indian businesses shouldn’t break out the champagne just yet.
In keeping with the federal structure of India, GST, it is proposed, would be charged by the central government and the states, both of which would charge the tax based on the ‘destination principle’.
Exports would be zero-rated, and imports would be taxed in the same way as domestic goods and services. Interstate supplies within India would attract the aggregate between the central government charge and the charge of the destination state.
A ‘GST council’, comprising federal and state representatives, will organise details of the new tax.
An extra tax of up to 1%, which would be charged by the central government, has also been proposed. Revenue from this tax would be assigned to the states. It is proposed that this tax would be levied for the first two years or possibly longer.
Benefits of the GST include:
• Widening the tax base
• Rationalising the tax structure and simplifying tax compliance
• Harmonising tax administration between federal and state tax administrations
• Automating tax compliance, which will reduce errors and increase efficiency
Nick Huber is a freelance journalist and has written for Accounting Technician magazine, The Guardian and BBC.