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India ready for July 1 tax overhaul, says revenue chief

Manufacturers, consumers set to benefit -- if IT upgrades handle changes

Indian Revenue Secretary Hasmukh Adhia addresses a GST meeting in New Delhi on April 25. (Press Information Bureau)

NEW DELHI -- The Indian government is confident that the country's ambitious goods and services tax will be rolled out as planned on July 1, Revenue Secretary Hasmukh Adhia has said.

Designed to replace more than a dozen confusing levies imposed by India's central and state governments with a uniform nationwide sales tax, the GST is expected to reduce prices for consumers, boost domestic manufacturing, make exports more competitive and generally help do business.

The tax regime "has been in the making since 2006, and finally we are ready to implement it," Adhia said at a meeting on the GST here. The government's "information technology system is ready, the law is ready and the rules are ready, too."

The GST will unify India into a common market. But issues such as upgrading IT systems and modifying accounting practices among corporations and merchants nationwide have led some to urge New Delhi to postpone the rollout to September.

"We are making a full effort to implement it from July 1," Adhia stressed Tuesday.

Understanding GST

The goods and services tax is levied on commodities and services, as opposed to a direct tax on income or wealth. "It is called an indirect tax because a consumer does not pay it directly, but through traders," Adhia explained.

Current taxes to be subsumed into the GST include the central government's excise duty and service tax, as well as the purchase and value-added taxes from state governments. Revenue is to be shared equally between New Delhi and the states.

The new system also will end cascading, or so-called tax on tax, Adhia said. An example of this practice occurs when the central government levies an excise duty on the manufacturing cost of a product first, and then the state imposes a value-added tax during the sale. A production cost of 100 rupees attracts a 12.5% excise duty. But then a 14.5% VAT is imposed not on 100 rupees but on 112.5 rupees, leading to tax on tax.

Additionally, when goods produced in one state are sold in another, the consuming state charges an entry tax of 2% to protect its local industry. Interstate trade also draws another levy of 2%, called central sales tax. The GST will abolish the entry tax and central sales tax, which should reduce prices for consumers.

If the cumulative tax on a product is 32% at present, it will drop to 28%, Adhia said.

The tax rate on services stands at 15%, but goods consumed in providing services such as furniture, stationery or air conditioning also attract some VAT, which the government estimates at 3% for a total tax liability of 18%. The GST regime will tax services at 18%, avoiding an additional burden.

Adhia noted that the GST allows an input tax credit to be claimed on levies paid on goods while providing services, a change that makes the 18% tax equivalent to 15%. This benefits large service providers such as banks and insurance firms, which buy goods in huge quantities.

Will it be inflationary?

Adhia dismissed fears that the GST will spark inflation.

"It [inflation] happened in other countries which moved to GST from single-point taxation," he said, referring to charging levies at only one stage of a supply chain and not on further profit addition. "We have already been tapping value addition at each stage from manufacturer to wholesaler to retailer. With GST, we are just merging the taxes of the central and state governments."

A GST council comprising representatives of central and state governments settled on four rates for the new indirect tax regime: 5%, 12%, 18% and 28%. But a zero tax rate will cover about half the items found in the consumer price index basket. Food grains such as rice and wheat will be untaxed, reducing inflationary pressure on consumers. The 33-member council is expected to finalize item-wise rates in May.

Import and export

"Imported goods will face the same tax burden as the domestic industry," Adhia said. This will boost Prime Minister Narendra Modi's "Make in India" initiative aimed at turning the country into a manufacturing hub.

Domestic manufacturers currently pay a 12.5% excise duty to the central government and 14.5% value-added tax to the state. Imported goods, in contrast, have a countervailing duty equivalent to the excise tax and a 4% special additional duty for customs -- far less than the VAT paid by domestic manufacturers.

The new system creates equality between taxes on locally made products versus those from foreign territories, Adhia said, while clarifying that a separate customs tariff on imported goods will continue and not be merged with the GST.

The GST system also benefits exporters, letting them get a refund of 90% of their tax claims within seven days. Exporters currently might not receive a refund of some taxes paid during the manufacture and transport of their products due to the fragmented nature of the indirect taxes between the central government and states.

"Right now exporters are getting excise duty refunded. Some states are also [refunding VAT], but the process may take up to two years," Adhia said. "But nothing was given back to exporters on the central state tax and entry tax fronts. Now, they will get full refund of the tax paid."

Adhia said the present system makes Indian products noncompetitive, and that the GST will benefit domestic manufacturing through both imports and exports.

Digital switch

But confusion naturally has spread as the GST rollout nears, and voices of concern are growing louder.

Praveen Khandelwal, secretary general of the Confederation of All India Traders, told the Nikkei Asian Review that 60% of the roughly 60 million traders across India have not yet switched to digital technology.

"CAIT is holding a two-day conference from Thursday in New Delhi in which 150 trade leaders from across the country will participate. We will brainstorm on what we can do in the next two months to make more and more traders technology-enabled," he said. "We may even have to launch an intensive national campaign to hold meetings with traders and help them embrace technology."

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