India has embarked on a path to a common goods and service tax (GST), which will replace the patchwork of indirect taxes in the Indian states. The new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system is projected to increase Indian growth by 2 percentage points as well as increase tax revenues due to greater tax compliance. The Indian parliament passed the four key pieces of legislation to stay on schedule for the July 1 rollout, but the GST council still has significant disagreements over the structure of the GST. Despite the disagreements, officials are confident that the GST will be implemented this summer.
The Finance Minister, Arun Jaitley, has projected a 2 percentage-point increase in economic growth after the GST is fully implemented. This is good news for a nation with per capita income that is one-fifth of China’s per capita income.
There are signs that the GST will deliver the growth that the finance minister promised. Foreign direct investment in India has increased since the upper house of India’s parliament approved a constitutional amendment on August 3, 2016, and foreign ownership of Indian bonds has risen $8 billion in 2017, signaling confidence in India’s ability to grow. India’s regional trading partners are preparing to increase trade with India as well. The Malaysian International Trade and Industry Minister expects an uptick in trade with India once the common GST is implemented.
Although politicians have touted the GST as a growth engine, Indian industries are skeptical that the GST will produce the promised economic growth. The business community worries that the bureaucratic complexities of adopting the GST will hinder any benefits to the Indian economy.
Despite the objection to the GST, the Indian parliament has moved swiftly to pass four bills that underpin the GST: Central GST, Integrated GST, Union Territories GST, and GST Compensation bills. The Central GST and Integrated GST bills will allow the central tax authorities to levy and collect taxes at the federal and state level. The Union Territory GST enables tax authorities to levy and collect taxes from transactions within state.
The GST Compensation bill is the carrot for the Indian states. The bill guarantees Indian states their current level of tax revenues from indirect taxes, which will be replaced by the GST. The GST Compensation bill proposes that if a state has a shortfall in tax revenues, the Indian central government compensates the state.
Although the building blocks are in place to roll out the GST in July, many are calling for a delay. Business leaders argue that the July rollout is optimistic, but not realistic. The GST council is still debating which goods to include in the GST and at which rates. The ambiguity from the GST council, along with only three months to prepare the new GST, has put many businesses in an uncomfortable position.
Despite the concerns from the business community, Revenue Secretary Hasmukh Adhia is committed to the July 1 rollout. He has directly told the business community not to count on a postponement of the tax.
The United States is familiar with this type of reform. The 1960s’ Willis Commission attempted to standardize the tax base for state income and sales taxes. Although there was initial success with model legislation introduced to states in 1957, the recommendations from the Willis Commission Reports, released in 1964 and 1965, were largely ignored.
India has become a test for tax policy within a federal system. Lessons learned in India’s transition to the common GST will be important to both the United States and the European Union. If India’s gamble turns out to be a boon to the Indian economy, the West may have to consider similar changes.
Share this article