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Why India’s New Tax Reform Is A Bold But Important Move By Modi

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Photo source: Narendra Modi twitter

On July 1, Prime Minister of India,  Narendra Modi rolled out a nationwide Goods and Services Tax superseding a previously complex tax structure to unify India’s population of 1.3 billion into a single market.

For many years, India had a very intricate tax system, with 16 different taxes at different rates in 29 different states. In the Asia Pacific Tax Complexity Survey conducted by Deloitte, a whopping 90% of respondents said that they would like to see tax reform in India. Modi delivered on improving the tax structure through GST, and while it was long overdue, it is better late than never.

Is India ready for this new tax reform?

The new tax will be used unanimously in all states and will have four bands of 5, 12, 18, and 24% depending on the good purchased. Because the majority of basic food items such as fresh milk, eggs, and meat are sold on the streets to individuals, many of them being low income, they will not be taxed. Moreover, companies making annual revenues of less than 2 million rupees do not have to abide by GST, eliminating the hardship of purchasing a computer and internet access in order to file tax returns, which will need to be filed online monthly.

Unfortunately, this aspect of the tax reform was not correctly thought out for a number of reasons. Firstly, it is difficult to pinpoint how exactly the government will be able to distinguish between who must charge GST, as many companies in India do not file annual revenues and sales figures. There is also the question of whether individuals will even be able to adjust to online tax portals to file returns, given that they may not have adequate experience with a computer. If these businesses choose to hire an accountant to process tax returns on their behalf, that is also an additional expense that they may not be able to afford.

With India’s abundance of small businesses and rural infrastructure, it is inevitable that the country’s economy will struggle for at least a few months before adjusting to the reform. However, in the long term, experts believe that GDP will increase by 40 basis points, accelerating India’s fast-growing economy. There is no question that the state of the country’s current economy is not prepared for the change; however, it is one of many necessary reforms that the country must embrace to revolutionize into a bigger, brighter India.

There are a number of benefits expected to arise from the addition of GST, which are listed below.

1. Increase in government revenue

If done correctly, introducing a tax to goods and services will provide an efficient way to raise government revenue. The four bands on India’s GST provide an equitable way to do this, as luxury items are taxed at a higher rate than essentials. This additional money for the government can be used for improving education, healthcare, and providing clean food and water for the millions in India living in poverty.

2. Lower logistics and inventory costs

GST would efficiently encourage the free movement of goods and services across the country. Instead of producing in many different places, it is now cheaper for companies to simply have one or two warehouses to manufacture their goods, which effectively lowers inventory costs. In terms of logistics, it is cheaper to transport goods and services because companies no longer have to pay a flurry of state taxes. This would also encourage foreign companies to invest here.

3. Increased competition for businesses

While companies earning less than 2 million rupees per year do not have to use GST, these same companies could be suppliers of raw materials to larger companies who will go elsewhere if they are not on the GST network. With time, this will essentially force every company to use GST because they know they will not get business without it.

4. Decrease in tax evasion

Tax evasion is a huge problem in India, with less than 3% of individuals paying income tax. Modi’s currency ban in January alleviated this issue, but other forms of tax evasion continue to be a problem. By forcing businesses to file tax returns every month, the government is able to obtain proof for all company sales to ensure that GST is, in fact, being paid.

When doing a cost-benefit analysis for the introduction of GST; anyone will be able to see that India’s new tax reform is not perfect. However, very few will argue against the fact that despite its boldness, it is a reform that will shape and digitize India’s economy for the better.

 

 

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