On Aug. 03, the upper house of the Indian parliament cleared the way for the Goods and Service Tax (GST), the country’s biggest tax reform in 70 years.
The GST, when implemented, will replace 17 state and federal taxes and bring them under one unified tax structure, turning India into one common market. Under the current complicated system, state and central governments levy multiple taxes, often leading to double taxation.
Prime minister Narendra Modi’s government wants to change all that and bring all the indirect taxes, such as value-added tax, sales tax, and octroi, under one umbrella. The GST is expected to add up to two percentage points to India’s GDP, which is already the fastest growing among the world’s large economies. The government wants to roll out the GST by April next year.
Over the next eight months, at least half of India’s states must ratify the bill.
Quartz spoke with Anita Rastogi, a partner for indirect tax at consultancy firm PwC India, to understand what the GST means for the government, companies, and the common man.
Here are the edited excerpts:
Could you tell us how the state GST and the central GST will work?
There will be two GSTs levied. One will be the central GST and the other will be the state GST. So, if the GST rate is 18%, (then) 9% will be the central GST and 9% will be the state GST.
What is going to be the rate of the GST?
The Congress party says the highest tax rate should be 18%. However, we also hear that a lot of states want a higher rate of 22% to 24%. The rate will be defined by the GST council, but if you are asking my opinion, I think it should be around 20%.
As of now, how much do indirect taxes add to the cost of the product?
It ranges from 27% to 32%. There are multiple taxes levied on goods that are manufactured in the factory. That significantly comes down with the GST.
But will the GST lead to higher inflation?
From a short term perspective, the GST might have a minor impact on the inflation. But, there are many other factors that lead to inflation. The prices of most goods will be lesser than what it is today. As far as services are concerned, there maybe a little increase in the cost. But in all, the impact will be very minimal.
What will be some of the challenges as far as the implementation of the GST is concerned?
The concept of taxation will be completely changed under the GST.
Coming to implementation, I think information technology and software alignment by corporates is very, very crucial. Corporates do not have a proper information technology framework and that’s very challenging. I would agree with the analysis that just about 20% of the companies are GST-ready.
But is it mostly the IT part of it that they need to be prepared for?
The other important aspect is that you need to know the impact of GST on your current transactions. Prices of goods are going to change, prices of services are going to change, and you will need to negotiate with your vendor because he is also going to have an impact of GST on his transactions.
There would be various benefits that corporates will get regarding (the) functionality of the credit. They have to decide if they would like to pass on all the benefit to the customer. It is the entire supply chain which will get impacted because at every level there is going to be a shift.
For the common man, what does the GST mean? Will things get cheaper or more expensive?
Okay, so basically, GST is a concept where the tax benefit is passed on to the end consumer.
When it comes to goods and products, we have a hidden tax of, say, 27% currently. This would come down to 18% (after GST), and then corporates can ideally pass on (the reduced cost) to the end consumer. So prices for goods will reduce.
I think to some extent some of the services may become a little expensive as the tax on services today is 15.5% and it may become 18%. But it will be a very transparent regime and the consumer is going to know exactly what tax he or she is going to pay. There won’t be any hidden tax.
And some products are exempt from the GST. What happens to them?
Alcohol for personal consumption is not included under the GST regime at all. This means alcohol will continue to be taxed the way it is today. As far as petroleum products are concerned, they are a part of the GST. However it will only be applied once the government notifies it. So if the GST rolls out next year, we will have to wait until the government issues that notification. I think for the first two years, petroleum products won’t come under the ambit of the GST.
Between the state and central government, there was talk of compensation. How will that stabilise?
So, for the first five years, the centre is going to compensate any state that suffers a revenue loss because of the GST.
What are the far-reaching consequences of the GST?
This has very positive consequences. I would say that the world wanted this unhappy current indirect tax regime to go away, and they wanted a more simplified, globally-accepted tax regime. Investors can now invest in the country and focus on their businesses rather than on tax issues.
Suneera Tandon contributed to this report.