(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Una Galani
MUMBAI, July 3 (Reuters Breakingviews) - India’s taxman is up against local ingenuity. Defying predictions of chaos, Saturday’s rollout of a nationwide goods and services levy was surprisingly smooth. The real prize of the landmark reform, which replaces a plethora of taxes levied across 29 states, would be shrinking India’s large informal economy.
July 1 marked the launch of the most significant tax reform since the country’s independence. But it was a day like any other for many consumers. The author of this column travelled through two states, passed through an airport, and bought groceries, collecting the usual handwritten receipts, without noticing any significant price inflation or disruption. If anything, some big retailers, automakers, and technology companies are offering discounts as they pass on the financial benefits of so-called “input credits” to customers.
Similar reforms elsewhere have increased prices following the introduction of one or two tax bands. But New Delhi has tried to avoid this by creating an unusually complex regime with rates of 5, 12, 18, and 28 percent. A reduction in tax rates for many food items mean that the reform could actually prove to be disinflationary, in terms of consumer price inflation.
The impact on businesses is harder to measure. Archit Gupta, the chief executive and founder of ClearTax, says his financial technology company received 140,000 queries about which rates applied to goods and services the day after the reform’s official launch. How smoothly the electronic invoice-based system functions in a country where connectivity remains a challenge may only become apparent in September, when the first comprehensive filings are due.
The ultimate success would be bringing more of India’s economy out of the shadows. GST makes it harder for big companies to work with unregistered suppliers. Assuming half of India’s informal economy, estimated at 22 percent of GDP, becomes formal, and is taxed at 18 percent, it could result in a tax-revenue boost equivalent to 2 percent of GDP.
It is easy to be sceptical after witnessing Indians creatively work around Prime Minister Narendra Modi’s shock currency-replacement scheme last year. Companies can game the GST system by registering multiple entities to stay below tax thresholds. But policymakers have had more time to think about plugging various loopholes and can amend laws as needed. Growing India’s tax base will be a battle of wits.
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- India’s new Goods and Services Tax (GST) came into effect from July 1. This is the biggest tax reform since the country’s independence.
- The GST replaces a plethora of taxes levied throughout India’s 29 states and creates a single customs union.
- The destination-based tax applies rates of 5, 12, 18, and 28 percent to different categories of goods and services.
- There is an extra levy added to the top rate for specific luxury and so-called “demerit” or sin items. Alcohol, electricity, real estate and petroleum are exempt.
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Editing by Quentin Webb and Kathy Gao