India: goods and services tax
While a new regime for goods and services taxation in India may increase costs in the short term, it will boost business in the long term, allowing foreign investors to reap rewards
India is preparing one of its most significant tax reforms, as the Goods and Services Tax rolls out on 1st July 2017. The tax reform, which replaces a multi-levelled, indirect tax system, aims to reduce the cascading effect of taxes. The Goods and Services Tax (GST) aims to create a single tax for a national market.
But businesses are concerned about two things. One is the ability of the government to provide clarity and certainty on the tax rates under GST. The other is the tax incidence under the new tax regime – how the balance of tax falls between sellers and buyers. The Indian finance ministry has assured businesses that the government and tax authorities plan to provide a suitable climate to aid business in India.
The GST Council, governed by Indian finance minister Arun Jaitley, has released updated tax groupings for the GST. Most goods and services will be taxed at a standard rate of 18 per cent, while some products will get full exemptions, and some luxury and “demerit” goods could face higher tax rates and additional taxes. The complete list of products and associated tax rates are available on the GST Schedule for Services uploaded by the Central Board of Excise and Customs here.
While the rates aim to provide some clarity, there are still several issues that companies might face under the GST regime.
Life insurance companies will need to obtain state-level registrations and comply with the requirement of GST law for each state distinctly. The existing service tax regime does not create this burden of registration in multiple states.
Subjecting life insurers to registrations and tax liability in different states could create several fundamental ambiguities, and will add to the compliance burden the companies in the life insurance sector will face.
The FMCG (fast-moving consumer goods) sector is likely to benefit from the implementation of the GST. The Indian government aims to keep the taxes on consumer goods low. While products such as milk, grain, and cereal are exempt from the GST, products such as hair oil, soap and toothpaste will be taxed at 18 per cent, significantly lower than previously. However, some premium personal-care products will be under the 28 per cent bracket.
Consumer durables and automobiles
Consumer durables such as refrigerators and air conditioners, as well as cars, will now be taxed at 28 per cent. While this marks an increase in the tax rate, the almost steady and inelastic level of demand for such products will give companies leeway to share the tax burden with consumers.
Telecom and Financial services
The GST on telecoms will be 18 per cent, which is 3 per cent higher than the current rates. This might hamper players in the telecom sector, especially companies that are seeking to expand and invest more in India. However, the impact of the higher tax rate will be offset by the availability of input credit for such services. The same holds true for financial services.
The higher rate of GST on telecoms and financial services could affect these sectors. Foreign telecoms and financial services players in India are keen to assist in initiatives such as Digital India by providing last-mile rural connectivity, and aiding financial inclusion programmes with financial services infrastructure development. The Indian government needs to tread very carefully to ensure that India continues to be viewed by these sectors as a desirable investment destination.
It is important for all companies to be aware of the possible financial and compliance costs the GST regime will entail. In the long run, the single tax system will help build a simpler and more conducive business environment, especially for foreign companies in India. However, companies might take a few financial quarters to stabilise and align their business strategy in a manner that allows them to realise the real benefits of the GST. Companies that operate in cognisance of this fact will be able to sustain their growth in India.