- The Goods and Services Tax (GST), India’s biggest tax reform since independence, will unify a $2 trillion economy into a single market. This big tax overhaul will be a test for India.
- Not only does the country’s size and diversity make the challenge daunting — 1.3 billion people, 29 states, 22 official languages — it’s also implementing multiple rates.
- “Certainly there will be an adjustment period, there is no doubt about that,” says Arvind Panagariya, vice-chairman of Niti Aayog, the government’s top policy planning body. It’s not clear “how painful or how long” this period would last. If you take a GST cue from other countries, about 160 of them, it’s never been that smooth.
- Here’s what some other countries went through:
When Canada implemented its goods and services tax in 1991, retailers offered customers “Don’t Blame Me for the GST” stickers amid cash-register snafus and vending-machine meltdowns.
Following the implementation of GST in April 2015, there were reports cash registers weren’t calibrated to deal with the new regime, government agencies weren’t ready and GST refunds were delayed.
3) South Korea
Following the introduction of a value added tax in 1977, a game of hide and seek broke out between tax officials implementing the new system and market vendors seeking to avoid taxation, prompting newspaper Dong-A Ilbo in 1978 to describe the year as a “365-day nightmare.” The day the indirect tax regime applied, some taxi drivers thought the new system applied to taxi fares and argued with customers that they need to pay 10 percent more than the price on the meter.
Three years after pledging in 1995 to “never” introduce a GST, Australia Prime Minister John Howard reversed his policy for the 1998 election, saying he was seeking a mandate to implement a 10 percent tax on most goods and services. He barely won amid a voter backlash, but that narrow victory was enough to legislate a GST that’s been used to fund health care and schools funding for the states. It excludes some politically contentious items such as fresh food, pre-owned real estate, and medical and education services.Current Prime Minister Malcolm Turnbull toyed with the idea of increasing the tax to 15 percent, but ruled that out in February 2016.
- For India, the tension is palpable. Taxpayers may be required to file as many as to 37 returns a year. Experts doubt the system will be able to seamlessly match billions of credits, facilitate tax collections, provide refunds and check evasions.
- “Non-functioning of the GSTN portal, due to technical glitches is something which could give sleepless nights to the industry and thus can be a dark nightmare, ” says Harpreet Singh, partner, indirect tax at KPMG in India.
- Some companies, particularly in the consumer goods sector, are selling off their inventories to avoid having to deal with two different prices for the same product. Some may also be delaying production so they can claim a credit against their costs for the first time under the new regime. Conversely, once July 1 rolls around there could be transportation bottlenecks as stores rush to restock.
- GST laws have introduced multiple new concepts like “supply” and “location of supplier” which can throw up different interpretations. Lack of tax literature and judicial precedents may add to confusion as industry and lawyers begin to grapple with new concepts, said Singh of KPMG.
“Overall there will be some nagging problems to begin with on the implication and compliance sides,” said Madan Sabnavis, chief economist at Credit Analysis & Research Ltd. in Mumbai. “But this will be temporary for the first six to nine months.”