Indian tax reform creates single market
In an ambitious bid to simplify its tax system, India is combining the systems run by its 29 states into a single, national operation. Gavin O’Toole explains
India has embarked on a sweeping reform of taxation, designed to create a single fiscal market across the country’s 29 states and support trade and business growth – boosting GDP by as much as 1.5%.
The reform’s proponents argue that the introduction of the goods and services tax (GST) will boost public revenues, simplify fiscal relations between India’s central and state governments, enable accurate monitoring of tax flows to aid budget planning, and enhance compliance with income taxes.
Testing of the online system is now underway, and tax records are being migrated into it. Shashank Priya, a commissioner on the GST Council steering the transition, said: “There have been teething troubles, but it is a major achievement in many ways. We have overcome all kind of challenges: different rates, taxation systems and procedures across the states and centre. At a more technical level and at broader policy and political levels, while there have been a lot of issues that have yet to be sorted out, we are almost at the end of the process.”
Over 10 years in the making, the GST was first proposed in India’s 2006 budget and has come to fruition after lengthy wrangling between the central government and states. A sweeping indirect tax on the manufacture, sale and consumption of goods and services, it will amalgamate a dozen different taxes levied by the central and state governments, reshaping the business landscape across India’s $2.3 trillion (£1.8 trillion or €2 trillion) economy. Under the existing taxation system, items crossing state borders can be held up for hours while payments are calculated and paperwork completed.
Although it was not pioneered by the government of the current prime minister, Narendra Modi, achieving this complex transformation would be seen as a big political achievement for him and his Bharatiya Janata Party.
Economists say the GST offers a range of economic benefits, beginning with an increase in the revenue collected and efficiency gains.
Priya said: “Studies show that we should gain about 1%–1.5% of GDP, and 42% of gross tax revenue is devolved to the states so they will gain accordingly.”
In a country where the low tax take severely constrains public budgets, the GST is intended both to broaden the tax base to cover more goods and services, and to improve compliance by making it harder to evade taxes.
Consumers will benefit from lower taxes on goods and services – the overall tax burden on goods is currently estimated at 25% to 30% – and from an end to the so-called “tax on taxes”: the cascading or double taxation effect whereby goods can end up being taxed more than once by various state tax authorities.
While critics of the reform initially warned that it could fuel inflation by pushing up prices, this has looked unlikely since the GST Council set moderate rates across several new tax bands in May.
The implications for public administration are significant, with the GST’s simplicity likely to ease administration and enforcement, making the economy more transparent and speeding up the movement of goods from one state to another. The migration of records to a computer-based system is also likely to have the collateral effect of boosting compliance with direct taxation, such as income tax, in a country where the vast majority of the 470 million-strong workforce survive in the informal sector.
“Now that the centre and the states face a similar set of issues when it comes to taxation, these administrations can complement each other and coordinate, meaning more efficiency gains and more complementarity,” Priya said.
The Modi government was clear that it intended to introduce the new system without increasing the number of public servants administering taxes, and Priya said that because information technology is at the heart of GST administration – every aspect of the process from registration onwards is carried out online – its introduction has not required an increase in the size of the bureaucracy.
There has, however, been territorial reorganisation to rationalise the presence of the revenue service. Each state will now get its own ‘commissionerate’ or tax centre and irregular, overlapping legacy jurisdictions have been scrapped. Specialised GST agencies for information technology, audit and enforcement are also likely to be created.
The introduction of the GST has entailed one of the largest training and public awareness campaigns for civil servants and stakeholders in India in recent years.
Priya said that a training hierarchy was created that fanned out across the country to familiarise up to 70,000 tax officials and public servants with the legal, operational and IT aspects of the new system. An extensive national GST Awareness Campaign has taken the message to stakeholders such as small businesses, and commercial and professional bodies have been accredited to train their members about the new tax.
Despite the size of the challenge, Priya said the GST’s introduction has so far been remarkably free of problems. The main lessons of India’s experience, he added, relate to how central and state governments found “common ground” on a complex issue of public finance.
“The lesson India has learned is that tax reform has to be a continuous process and we have to keep looking at how to address roadblocks as they occur; and in this, we ourselves have drawn on lessons from the European Union and Canada, among others,” he said.
“Our experience demonstrates what can be achieved in a federal system by negotiating and working among ourselves to reach a common objective.”
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See also:
Indian demonetisation may clear the way for radical tax reforms
About Gavin O’Toole
Gavin O’Toole is a freelance writer and editor in London. He has written for leading newspapers, magazines, wire services and business schools about financial markets, business and regulation around the world. He has a particular interest in international relations, and a specialism in Latin American affairs. He has conducted research on this region’s political economy and has also published a number of books about its politics and natural environment. His latest title, Environmental Security in Latin America, will be published by Routledge in September 2017.
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