India's GST will come on
time, but multiple rates will dilute benefits
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[November 04, 2016]
By Douglas Busvine and Manoj Kumar
NEW
DELHI (Reuters) - 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 third-largest 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.
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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.
FOGGY OUTLOOK
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.
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![](../images/110416pics/busine9.jpg)
Jay Kannaiyan, who runs a startup Smart Air Filters Pvt Ltd, speaks
during an interview with Reuters at his office in New Delhi, India,
November 2, 2016. To match Analysis INDIA-TAX/ Picture taken
November 2, 2016. REUTERS/Adnan Abidi
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RELABELED, NOT REFORMED
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.
Jaitley argues that multiple GST rates are needed to prevent the tax
falling too hard on the poor. "Air conditioners and hawai chappals
cannot be taxed at the same rate," he wrote in a recent blog post, using
the Hindi name for flip flops.
GROWTH BOOST DILUTED
Business groups, tax experts and economists say the GST, if passed in
this form, would generate less of a lift to economic growth and state
revenues than a simpler tax.
"An ideal GST would have carried one single rate with very few
exemptions - instead what we've got is a multiple tax rate structure and
multiple exemptions," said Pranjul Bhandari, chief India economist at
HSBC, who has halved her forecast of the GST's growth boost to 0.4 of a
percentage point.
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Where accountants do find fault is with the proposed cess that would
raise funds for Jaitley to offset initial revenue losses to states
arising from the GST.
"The concept of a cess is a distortion," said Sachin Menon, head of
indirect tax at KPMG India. "The very purpose of the GST is to remove
multiple taxes and to have a uniform law and uniform taxes across the
country."
(Writing by Douglas Busvine; Edited by Martin Howell)
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