India’s GST Regime Comes Into Effect

By Global Tax Weekly

India’s indirect tax reform promises to be a transformational, generational change that will unleash the full potential of this sleeping economic giant while modernizing the tax system and widening the tax base. And the Government deserves a great deal of credit for driving the reforms through in the face of hostility from state governments and with a political opposition which initially opposed the reforms for opposing’s sake (ironically, the same opposition that proposed GST in the first place when in government some years ago – that’s politics for you!).

Nevertheless, this is a reform made by committee i.e. it recognizes several competing interests and consequently is one big, far-from-perfect compromise. And this is reflected in the somewhat complex three-tier state/central/interstate regime, which effectively has two standard rates (one is the norm), in addition to a reduced rate and a “luxury” rate.

One suspects that in a country where most businesses will probably have little or no experience of value-added tax regimes, which by their very nature tend to be record-keeping intensive, this is going to take some getting used to.

There is scope for simplification down the line, for example by consolidating the four rates – actually, it’s potentially five, as the legislation allows room for states to apply GST in excess of 28 percent on certain items – to three or two. For the sake of taxpayers in India, I certainly hope the regime isn’t added to and complicated further. However, I’m not optimistic.

While China and India have taken substantial strides towards better tax systems for businesses, Deloitte’s most recent Asia Pacific Tax Complexity Survey came to the rather unsurprising conclusion that, on the whole, the region’s tax regimes remain complex. Except, of course, in Hong Kong and Singapore. Still, the survey did uncover some surprising results.

One key finding was that there seems to be competing forces at work. On the one hand, Asia-Pac’s emerging economies have poured resources into projects aimed at improving the predictability of taxation. China was cited as a notable example, where thousands of tax officers have recently received  training, resulting in more consistent interpretation of tax laws and regulations, and more predictable handling of tax cases.

Yet these efforts are being undermined on the other hand by frequent changes to tax regimes, which are being made both to modernize tax systems and to integrate BEPS measures into tax frameworks.

Another noteworthy finding was that taxpayers in the region no longer consider tax complexity as their number one concern – they have come to accept complexity as a fact of life of doing business in places like China, India, and other leading emerging economies. No, predictability and consistency are now much more valued by businesses, and in their absence, firms are tending to take much more conservative tax positions.

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