In­dia’s GST will come on time, but rates will di­lute ben­e­fits

Ji­hadists slaugh­ter 24 ex-ISF of­fi­cers

Kuwait Times - - BUSINESS -


In­dia moved a step closer to cre­at­ing a na­tional sales tax but a deal on rates reached on Thurs­day will hit some busi­nesses harder than oth­ers, while its com­plex­ity will di­lute any boost to growth and un­der­mine its re­li­a­bil­ity as a rev­enue gen­er­a­tor. The Goods and Ser­vices Tax (GST), due to be rolled out from April 1, 2017, had been billed as the one re­form that could help Prime Min­is­ter Naren­dra Modi de­liver on his jobs and growth agenda. In a key Modi win, par­lia­ment amended the con­sti­tu­tion in Au­gust to clear the way for the GST, which would unify Asia’s third­largest econ­omy into a com­mon market for the first time.

But Thurs­day’s bar­gain be­tween Fi­nance Min­is­ter Arun Jait­ley and his coun­ter­parts from In­dia’s 27 state gov­ern­ments has ex­posed the dif­fi­cul­ties of deal­ing with so many stake­hold­ers.

The GST Coun­cil, set up to over­see the tax, agreed on a more steeply pro­gres­sive struc­ture for goods than ear­lier fore­seen with rates of 5, 12, 18 and 28 per­cent, de­pend­ing on the kind of prod­uct in­volved. The top rate, Jait­ley said, would ap­ply to the kind of goods bought by mid­dle-class In­di­ans.

On top of that, es­sen­tials like grains that make up half the con­sumer price in­dex would not be taxed at all. Fi­nally, a “cess” - a sep­a­rate cen­tral tax - would be added to the top 28 per­cent GST rate on lux­ury cars and harm­ful prod­ucts like to­bacco and fizzy drinks. The to­tal bur­den of this “sin” tax still has to be worked out, as does the rate ap­ply­ing to ser­vices that are now taxed at a rate of 15 per­cent.

“In­dia is like the Euro­pean Union with a cen­tral gov­ern­ment,” said Har­is­hanker Subra­ma­nian, head of in­di­rect tax at EY. “This is fis­cal fed­er­al­ism. It’s not easy.” De­spite the loose ends, it now looks in­creas­ingly likely that par­lia­ment, which opens its win­ter ses­sion on Nov 16, will be able to pass key GST laws, as state as­sem­blies must also do, to keep the launch timeline on track.


The GST should be a pos­i­tive devel­op­ment for Jay Kan­naiyan, who runs a startup that makes and sells low-cost air pu­ri­fiers, a prod­uct in big de­mand be­cause of an air pol­lu­tion cri­sis in the cap­i­tal New Delhi and other In­dian cities. Kan­naiyan backs the GST be­cause it would free his firm, Smart Air Fil­ters Pvt Ltd, from the red tape aris­ing from value-added tax (VAT) that is cur­rently col­lected by the states and is one of sev­eral levies due to be abol­ished under the tax re­form.

VAT rules vary widely, and the tax can be levied at dif­fer­ent times dur­ing the trans­fer of goods, de­pend­ing on the state. “It is a has­sle as it slows down our op­er­a­tions,” Kan­naiyan, 35, said at his tiny workspace in a dusty com­mer­cial district on Delhi’s south­ern fringes.

His great­est worry is the pos­si­bil­ity that con­sumer durables will be taxed at the top 28 per­cent GST rate, not the 18 per­cent ear­lier fore­seen, hurt­ing his mar­gins. Which prod­uct is as­signed to which rate still has to be worked out. The un­cer­tainty “hurts us, it hurts our plan­ning,” said Kan­naiyan, who plans to more than dou­ble sales in the next year.


It’s a far cry from the at­tributes of a so-called “good tax” that is low, flat and broad. And ad­vo­cates of a sim­pler GST have gone on the of­fen­sive, de­nounc­ing the cur­rent pro­posal as a mere re­la­bel­ing; not a gen­uine re­form.

Of­fi­cials and ex­perts in­volved in the pol­icy process say Jait­ley took the path of least re­sis­tance by pitch­ing tax rates broadly in line with the ex­ist­ing bur­den to avoid any un­wel­come spike in in­fla­tion when the GST comes into force. “The ap­proach out­lined by the au­thor­i­ties sig­nals a dis­ap­point­ing be­gin­ning which well could have been oth­er­wise,” said Vi­jay Kelkar, a for­mer fi­nance sec­re­tary who penned a land­mark 2009 re­port on the GST. — Reuters

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