India’s unified Goods and Services Tax which has been introduced to make business easier, is one of the most complex taxes with the second highest rate in the world. According to the bi-annual India Development Update by the World Bank, there are only five countries in the world which have four or more tax rates. Majority countries have either one or two tax rates. Apart from India, there are four countries with more rates which include Italy, Pakistan, Ghana and Luxembourg.
India’s GST top slab of 28 percent is the second highest out of the 115 countries compared by the World Bank. The landmark tax reform of India was off to a chaotic start after about two decades of efforts. A GST council deliberated over the rates and the implementation of the same over numerous meetings and for many months. The tax overhaul did bring along some issues and disruptions. Dealers reduced production and stocked up on inventory which pulled down the growth to a three year low. Although the economy has recovered, the revenue collections have taken a hit. The World Bank stated that India’s threshold for GST registration is also the highest. Those businesses with an annual turnover of INR 1.5 crore fall under GST and are eligible to get an input tax credit. The ones with annual sales below the threshold and over INR 20 lakh are allowed to pay a flat tax rate of one percent but cannot charge GST on sales or claim for credit.
This is mainly to ease the cost of compliance for small businesses. GST was accompanied by the disruption of state administrations. There was lack of clarity on the discontinuation of the local taxes; there were demands for exemptions and lower tax rate. There were reports of increased administrative tax compliance and a lock-up of working capital.
While the problems on administrative and design sides persist, the introduction of GST can be considered as the start of a process and not the end. The economy is adapting to a new system and the GST council has been evolving in the tax structure. The benefits of GST are likely to outweigh the costs in the long run.
The key to GST’s success would be a policy that reduces compliance burden by reducing the number of different rates, simplifying the laws and limiting exemptions.