India Launches Ambitious Tax Reform

One of the most ambitious plans for economic reforms in India over the last 70 years will boost the country’s tax receipts and provide businesses with simplicity, but its true impact might not be felt for as long as 10 years because of implementation challenges say experts.

Following a deadlock in the India parliament for a number of rounds, the country rolled out its Goods and Services Tax or GST as of July 1, which replaced a group of indirect state and central levies that critics have argued blunted competitiveness in the economy and hobbled the efforts of lifting more from poverty.

Observers described the new reform as a change that is the most meaningful to the tax regime in India since the country’s independence in 1947.

The GST will be introduced for a number of different goods and services along four rate bands of 5%, 12%, 18% and 28% irrespective of where the purchase was. Certain goods like meat, milk and eggs amongst others will not be taxed, showed a list compiled by the government.

One senior economist from a bank in India said that the complete economic potential of the historical reform could take a number of years to materialize due to India needing to build its tax ecosystem.

He added that it would be at least five years and likely closer to 8 or 10 years prior to the potential being seen for the tax system.

In the short term, he added that the reform would formalize more of the untaxed economy in India that will help to increase efficiency but would not help with the size of the country’s gross national product.

In a report by HSBC in May, it was predicted that the rollout of the GST would add approximately 40 basis points to the GDP growth of India over the medium term, which is lower than initial forecasts of 80 basis points.

Though experts are in agreement with the benefits over the long term, including the easing of doing business in India, as well as brining in large amounts of the informal economy of India into the tax net, they said the short term could cause substantial disruptions.

Much of the processing of taxes and refund claims under the new GST system will be electronically carried out which underscores the bid by Prime Minister Narendra Modi to digitize the country.

Businesses will be required to align existing software with the tax portal online that was started by the GST Network to process input and tax filing for credit claims.