India’s Big Tax Reform

On Saturday, 1 July 2017, India introduced a ground-breaking tax reform law, through a constitutional amendment.

The Goods and Services Tax (GST) introduced through the Constitution (One Hundred and First Amendment) Act 2016 has finally come through. And it is the ‘biggest tax overhaul’, since India’s independence in 1947, passed after months of debate in Indian Parliament.

This is a Value Added Tax (VAT), and is proposed to be a comprehensive indirect tax levy on manufacture, sale, and consumption of goods and services at the national level.

VAT had been already in vogue in India for several years. But this new GST will replace the old VAT system, with a newer tax structure, across a wide range of goods and services throughout the country.

It is a momentous event because India is the second largest country in the world, on population. And also because the revenues of the state and central (federal) governments – and thereby the stability of India’s future – are undeniably wedded to this tax reform.  

It will also replace all indirect taxes levied so far, on goods and services, by the Indian Central and state governments.

Unlike in the past, this GST is likely to be much simpler. This could benefit suppliers, traders and customers by making it clear to them, on invoices and receipts, how much they are paying, and for what. The various old accounting heads will now go.

With clear explanation of percentages, on which portion is to go to central government funds and which one to state, the revenue departments would find it easier to collect what is due to their respective governments.

But, I think, with different slab rates, for different industrial sectors, and for different product categories, it could take a while for all shops and establishments to adapt to the new tax structure and systems.

Confusion, therefore, reigned in many cities when the law came into effect on the midnight following 30 June; especially, with small and medium business bearing the brunt of this new law.

There has been a sudden scramble for changing of price tags, changing of computer software systems, printing of bills, invoices and receipts, all of which will, obviously, frustrate the ones involved.

But, we know that India has one of the lowest tax-to-GDP ratios in the world. So, reining in higher revenue, in an easier way, is really the need of the government. Many welfare schemes of the government cannot come to fruition without additional revenue.

Now, with the rising middle class, and with the decreasing poverty, maybe, the time is ripe for India to take this bold decision, of ensuring better taxation.

With growing digitization, it will also effectively discourage those who had been evading tax. Those who had been into spurious bookkeeping, without revealing the full extent of their business performance, will now come into the open.

In the short run, there could be teething problems, but in the long run, this change in taxation could bring about a sure-shot economic benefit to the country.

But as in many cases, it is not only in the passing of a law to collect revenue, but it is also in the implementation of the same, that would bring in needed returns to the treasury.

Education and training too, particularly for small traders, is critical.

And if all goes well, maybe Prime Minister Narendra Modi will go down in history as one of those great prime ministers who modernised Indian economy.