(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Una Galani
MUMBAI, June 13 (Reuters Breakingviews) - India is heading
down a bumpy road. The country is under-prepared for the July
1 nationwide rollout of a complex new goods and services tax
which will create a single customs union, replacing a myriad of
charges levied across 29 states. But for all the shortcomings,
the reform smoothes the way toward a more efficient, less
The overhaul is far from the ideal of single flat rate.
India’s GST will instead have bands of 5, 12, 18, and 28
percent, plus an additional levy for certain items like chewing
tobacco, fizzy drinks, and luxury cars. Petroleum products,
alcohol, and electricity are among the exempt items.
The hope is that a tiered system will avoid a rise in
consumer price inflation that typically results from the rollout
of simpler structures, as most recently seen in Malaysia.
That’s an important feature as Prime Minister Narendra Modi is
due for re-election in 2019.
The downside of the complexity is a lower boost to
growth. Economists at HSBC now expect a medium-term GDP uplift
of 40 basis points after the change, half their
original forecast before the details were agreed. Meanwhile,
ambiguity over how all sorts of things are categorised will
inevitably lead to rent-seeking from some tax officials.
Graphic: India's fiddly GST is designed to avoid a jump in
The long-term benefits could be profound, however. The
process requires companies to electronically upload reams of
invoices and reconcile them with vendors. That will allow
taxpayers to use their invoicing history to secure better
borrowing terms, and make it harder for company owners to
understate their personal income. Enterprises, like logistics
firms, will be able to pick the most geographically logical
location for new warehouses, instead of hunting for the
state with the lowest taxes.
The big unknown is how much disruption the transition will
unleash. Tax experts and company executives expect longer
working capital cycles, and general uncertainty for up to one
year. Indeed, most small and medium-sized companies are
still coming to grips with basic concepts like input credits.
New Delhi may well have to grant them a period of clemency.
Yet Modi’s masterful political spin last year on his radical
"demonetisation" experiment, in which he cancelled most of the
country's bank notes by value, suggests he can manage any
teething pains. Unlike that unorthodox reform, this one enjoys
near-unanimous political support.
On Twitter twitter.com/ugalani
- India's new Goods and Services Tax (GST) will come into
effect from July 1. It is seen as the country's most significant
tax reform since independence.
- The GST will harmonise the variable tax rates currently in
effect throughout India's 29 states and create a single customs
- The destination-based tax will apply rates of 5, 12, 18,
and 28 percent to different categories of goods and services.
There will be an extra levy added to the top rate for specific
- Alcohol, electricity, real estate and petroleum are
- For previous columns by the author, Reuters customers can
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(Editing by Pete Sweeney and Nicolle Liu)