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India’s New Goods and Services Tax: Challenges and Opportunities

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Photo: Pixabay

After years of deliberation, India’s Goods and Services Tax (GST) was legislated on the 1st of July 2017. The tax replaced a more complex system of indirect taxes levied by both the federal and state governments with a single tax that applies throughout the Indian market. It is one of the most significant tax reforms in India’s history and may prove to be the most transformative economic reform of the Modi Government. By replacing an older, more complex tax system, the GST paves the way for a unified national market and the rationalisation of India’s logistics sector. This creates several important opportunities for Australian firms engaged with India or wishing to become engaged.

India’s recently implemented GST is a value-added tax on goods and services that is structured in such a way as to prevent cascading of taxes. Unlike the introduction of Australia’s GST – which chiefly aimed to broaden the tax base – India’s GST has been designed to overcome structural economic inefficiencies, improve the ease of doing business and increase tax compliance. Although it will result in a significant reduction in the tax rate in a few select sectors – notably manufacturing – the main benefit of the tax comes from the fact that it replaces India’s previous, messy system of indirect taxes.

The GST represents a major policy reform, with several positive implications for the Indian economy. It greatly improves the ease of doing business. It has been projected that in the long-term it will facilitate an integrated national market and a 1.5-2% increase in India’s GDP growth rate.

There are five key ways in which the GST is likely to provide a boost to the Indian economy:

  1. Simplified Tax Structure and Increased Compliance. The GST replaces 17 indirect
    taxes levied by state governments and the central government. The simplified tax structure creates greater economic efficiency, lowers compliance costs and therefore is expected to reduce tax evasion.
  2. Boon for Value-Added Goods. The structure of the GST allows offsets to be claimed for tax paid at earlier stages of the supply chain. Under the previous tax system, taxes were cascaded along the supply chain, increasing the cost of the final product. The change will not only benefit consumers by lowering costs, but also producers of value-added goods – particularly in the manufacturing sector.
  3. An Integrated National Market. The former tax structure provided incentives for companies to localise their production and supply chains within particular states. The new simplified tax structure removes barriers to the integration of regional markets throughout India and the development of nationally distributed, more efficient and rational supply chains.
  4. Increased Revenue. The GST is a broad-based tax, applying to all levels of supply chains. It renders almost all goods and services taxable. It will, therefore, assist government in broadening the tax base, raising greater revenue without creating major economic disruption.
  5. Reduced Corruption. By absorbing the plethora of state-based taxes and eliminating many border tolls, the GST removes a number of opportunities for corruption.