India’s Boldest Step Since Independence

Aditya Gupta | Nov 19, 2018

The world’s eyes have been on India since the long overdue economic reform process started in 1991 and was followed by Reforms 2.0 between 1998-2004. We are now at Reforms 3.0, which includes demonetization and a shift to the digitization of the Indian economy -- and has ended up being the most severe in impact since it started over a year ago.

With these three stages, India witnessed several major changes. For example, we gradually moved from a maximum income tax rate of up to 90% a few decades ago to a maximum rate of 25% today, and most goods are off the restricted list and now allowed.

However, nothing will have the impact that “Reforms 3.0 -- the Implementation of GST” will have on the country and its economy. We are on the brink of a major step for India’s future.

This reform has several aims:

  • A major change is the implementation of an even Indirect tax rate across the country. In earlier times, it could vary up to 7% between states, which led to different pricing across the country. This single tax replaces up to 17 different taxes and 23 cesses (Editor’s note: A “cess” is a tax or levy in a few countries, including India. It’s a term that’s a shortening of the word “assessment.”). Several local taxes, such as the 5% Octroi tax, specifically just for Mumbai as an example, will now be eliminated.
  • Classification of goods will now be based on the International HS Code system instead of different categories, numbers, or even just descriptions, applied by various departments and states as per their understanding. The co-relation of these descriptions/categories was earlier required when moving the goods physically between states or paying different applicable taxes.
  • All this simplification reduces extensive documentation – documentation that has been  different from state to state. The move eliminates clearance through physical checkpoints at state borders which had the effect of making one feel as if one was operating across international borders. The savings in money and time cannot be valued enough.
  • Previously, most of these taxes could either not be offset at all or at best, only partially offset, therefore creating a cascading effect on the final price. These pricing problems and accounting issues have both been resolved in one stroke. Furthermore, the cost of taxes paid on operating expenses will now also be offset, bringing down an Indian business’s  overall costs.
  • The largest single benefit to the country will be the expected substantial increase in direct tax collections, as currently only 1-2% of the population falls under the Income tax net as all sales and movement of goods is compulsorily recorded. It will also reduce the parallel economy (estimated to have been at over 30% at its peak), and the growth figures, which remained outside the calculation, will be added to India’s GDP to show the correct annual numbers. 

On the downside, there are still some incomplete issues which need to be addressed:

  • Instead of a single GST rate, there are four different slabs (EDITOR’S NOTE: A “slab” is a range of income determining a tax rate in India) plus a couple of cesses at this time.
  • Some key products / services will become more expensive to end clients.
  • A major input cost like fuel has been kept out of GST and this could have been a major cost saving.

Even so, the pros far outweigh the cons and the entire organized sector looks forward to the future with great positivity and anticipation. 

Aditya Gupta is with the integration firm CCIIPL in Mumbai.