The push for bringing in GST in India under a "one country - one tax" solution is probably the second most radical game changer in the Indian economy after the demonetisation exercise conducted a few months ago by the Narendra Modi-led BJP government in India. Looking to radically push the economic output for the country, the government had been prioritising on removing red tapes, which have been clogging the business and investment pipelines in the country for many decades. Aggressive initiatives such as the "Make in India" drive, along with the likes of land and economic reforms, and seeking to increase foreign direct investments (FDI) into the country signify and cement the priorities set by the government in the country. While the government did face quite a hurdle in passing the GST bill, we finally have the uniform taxation policy from July 1 onwards.
What this means for India
India's taxation has been archaic and downright difficult to handle, especially considering the various different state and central taxes in play including the Central Excise Duty, Service Tax, Countervailing Duty, Value Added Tax (VAT), Central Sales Tax (CST), Entertainment Tax and Luxury Tax. Amalgamating several of these state and central taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market and lead to easier administration and enforcement.
From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which are currently estimated at 25-30 percent, facilitate free movement of goods from one state to another without the prolonged paperwork and queuing at state borders for hours for the payment of state tax or entry tax, to a large extent.
This would also translate to facilitating a high-growth trajectory for the Indian economy. However, the key to the reform's success would very much depend on how it is being implemented, and considering the deadline is fast approaching, there are still signs that Indian industry and especially rural and semi-urban businesses are ill equipped for such a major transformation. There is also inherent that the short-term impact may be as significant as demonetisation, if businesses, especially in the rural and developing areas, prove unable to adapt to the new system in the middle of 2017-18 fiscal year.
Whilst these challenges are daunting, the long-term benefits of the GST could prove its most attractive element, with lower tax evasion and reduced costs for governments and businesses making the Indian business landscape ripe for even greater investment. It would also further cement India's position as the world's most pre-eminent growing economy and a leader amongst other countries that follow suit and implement a similar tax.
Key takeaways for foreign firms
As for foreign businesses operating in India or looking to set up shop in the subcontinent, the singular taxation system will unify India's 29 states into a single market - just like how the European Union operates. The current complex and often overlapping tax system proved to be a daunting experience for foreign investors, which the GST will now ease. Foreign business and manufacturers will also be more confident and inspired to enter India as the GST system intends to abolish the interstate toll checkpoints which will make the movement of goods between states much easier and cheaper.
Another important aspect of the implementation of the GST is the soft power that it demonstrates. The Indian government will take up the implementation of GST as a living proof the commitments and bold decisions it can take to create a predictable environment for foreign investors. With the many foreign trips slated for the summer, including to Germany, Spain and Russia in the coming weeks, the Indian Prime Minister Narendra Modi will surely bring this up during his diplomatic interactions in a bid to attract more investments into India.
One of the growing concerns with regards to the taxation debate has always featured direct and indirect taxation. While some argue that the GST policy heavily depends on the indirect taxation, other than focusing on a direct taxation on the elite, it has to be understood from the abilities and possibilities from India as such. Unlike the well to do GCC economies from the Middle East which have a cash rich industry such as the oil trade to support and supplement its governance, India is largely fragmented.
An indirect taxation, therefore, makes it a shared burden on the people, which is workable. We also have the menace of tax defaulters and money launderers operating out of the very many loopholes present in the archaic laws. A system which heavily relies on direct taxation will, therefore, be very difficult to manage. Of course, after the roll out of GST, it is very important that the Indian government now focuses on initiating reforms to also straighten direct taxation as well.
History has shown GST has been efficient
All around the world, GST has the same concept. In some countries, VAT is the substitute for GST, but conceptually it is a destination-based tax on consumption of goods and services. While different countries have varying rates of taxation, the only other country which has a similar dual structure GST like India is Canada.
Another aspect encountered and accepted by most of the GST countries is that it is inflationary, which forces them to initiate price control to mitigate the risk. Countries such as Singapore and Malaysia initially faced difficulties in moderating their inflation to readjust GST, despite having a good year and a half to introduce the single taxation system.
More importantly, India can draw solace from the fact that GST implemented across the countries have proven to be an efficient tax collection system despite teething problems in the initial implementation period.
Now that the government has laid a basic groundwork to initiate a single market through the common tax, the Narendra Modi cabinet has undertaken further simplification in addressing necessary sector wise FDI clearances by abolishing the Foreign Investment Promotion Board, which was set up during the initial period of economic liberalisation in the early 1990s.
Now, the FIPB will be replaced by a new mechanism under which the proposals will be approved by the ministries concerned as per the standard operating procedure approved by the Cabinet. This will truly expedite India's economic development.
As for us as an international law firm headquartered in London, the GST simplifies the scope and capabilities as a market sector, besides the already generous legal sector exemption from GST net. We are looking forward to a unified India.
The author is managing partner, Zaiwalla & Co. a London-based law firm; views expressed are personal.