Why implement GST?
India’s complex tax system has been a major challenge for foreign investors. India has 27 states; each state has its own government and parliament and they have the right to their own jurisdiction of the goods, services, the implementation of different tax rates and tax law.
Among them, most taxes are collected twice by both the central and local government agencies. The taxes that Indian taxpayers used to pay in the past are: national value-added tax, central consumption tax, service tax, transit tax, city tax and other complicated indirect taxes. This has a lot of adverse effects on market transactions, which is an important reason why the Modi government has been pushing for GST tax reform since it came into power.
How will implementing GST affect India
There are definitely more pros than cons to implement GST in India. Over the years, India’s complex and messy taxes have discouraged many investors. Now, it is expected that the implementation can effectively improve existing problems so that consumption tax is more uniform and clear.
The adoption of the GST will bring the following benefits:
- Increase the work efficiency of the country and its government sectors
- Duplicated taxation is eliminated
- A unified tax system will make India a unified market
- Once tax rates for goods and services are unified, many tax disputes can be resolved (e.g. the controversial debate of if hotels are providing services or goods)
- GST reduces the burden that manufacturing industry face and helps improve their domestic and international competitiveness
- National tax information will be digitalised to effectively reduce tax evasion
- Avoid using tax rates to engage in malicious competition between states
- Simplifies tax processes and operating costs
It is worth mentioning that all businesses in India will benefit from the new consumption tax, especially start-ups and SMEs.
Cons of implementing GST
The passing of GST bill is a good thing but this is not the case for some industries. For example, the media, textile and telecommunications industries are subjected to a steep increase of tax rate. Also, some enterprises especially the service industry will experience higher operating costs.
The adoption of the GST will bring the following drawbacks:
- Service-related tax rates will increase significantly (14% – 20%)
- Retail tax rate has nearly doubled
- Imported goods will be taxed at a higher rate (around 6%)
- Taxes will be controlled by the central and local government agencies. Companies will have to interact with both authorities, increasing its operating costs
- All relevant processes will be carried out on the GST network system, making it difficult for small businesses to operation
Perfect timing for Singapore businesses to enter India
India’s market has always been extremely challenging due its complex tax system and remain prohibitive for many foreign companies. With the implementation of new GST tax, it is expected to strengthen the confidence of investors.
If India is able to replace the local taxes of at least 17 provinces and the taxation of India’s central federal government with GST, all overseas enterprises will save on unnecessary costs when selling their products across India and is easier for them to expand their business.
This is definitely good news to Singaporean businesses as India’s market is massive and has showed spectacular growth, even overtaking Singapore and China to become an emerging market with unlimited potential. It will certainly become one of the key markets that large companies are planning to enter.
According to India’s local and international financial institution’s prediction, GST is expected to boost India’s economic growth by 1-2 percent.