August 10, 2016 4:00 am JST

Modi hails GST as relief from 'tax terrorism'

KIRAN SHARMA, Nikkei staff writer

Indian Prime Minister Narendra Modi speaks in central Madhya Pradesh state Tuesday. His government has passed much-sought tax reform. (Photo by Press Information Bureau)

NEW DELHI -- Calling the much-awaited goods and services tax a "great step" toward India's transformation and transparency, Prime Minister Narendra Modi has proclaimed that the country's biggest economic reform in decades ultimately will make the consumer king.

The GST will bring uniformity in India's taxation, subsuming seven to 13 indirect taxes and letting the country become a common market.

The political consensus over the GST proves that national issues are above politics in India, Modi said in Parliament's lower house Monday evening.

The consumer will emerge supreme, Modi said. "It will simplify the tax structure and help small businesses," he said.

A bill to amend the constitution and allow for the rollout of the GST was approved in May 2015 by the lower house, where Modi's Bharatiya Janata Party has a majority. But the legislation stalled in the upper house, where the party's numbers are weaker. The upper house cleared the bill last week after the government incorporated changes sought by the opposition Indian National Congress, including scrapping an additional 1% tax on the interstate sale of goods.

The lower house took up the bill again Monday to approve the changes, with all 443 members present in the 545-member house voting in favor.

Modi later tweeted that it was a memorable day for India's democracy. "Today we have taken a historic step in the journey to free the nation from the menace of tax terrorism," he added.

The prime minister, in his statement at the lower house, sought to address concerns that the unified tax would raise inflation and hurt the common man. The GST excludes most of the things that can impact consumer inflation, Modi said, as well as all commodities used by the poor. "About 55% of food items and essential medicines will not be part of GST," he said.

Complex indirect taxation

The bill means that India will be able to implement a unified sales tax replacing the array of confusing levies imposed by the central and 29 state governments. Taxes to be subsumed include the excise duty and service tax from the central government and the value-added tax and entertainment tax levied by the state governments.

Lalit Sharma, a New Delhi-based tax expert, said the GST will abolish the cascading effect of multiple taxes. Sharma cited an example of the current system, saying that if a registered dealer in one Indian state buys a product worth 10,000 rupees ($149) from another state, he pays a 2% central government sales tax taking his cost to 10,200 rupees. If the dealer fixes his profit on this product at 20%, his sale price would be 12,240 rupees.

But when the dealer sells this product within his own state, the local sales tax would be calculated on 12,240 rupees, Sharma said. Assuming the state tax rate is 10% -- it varies from one state to another -- the final price of the product would be 13,464 rupees.

The 10% state-level sales tax is also being charged on the central government tax of 200 rupees already paid by the dealer, producing a cascading effect of 20 rupees. "This problem will be solved when GST is enforced," Sharma says.

Aadesh Kumar Jain, a chartered accountant, said the GST also will bring uniform tax rates. In the Indian capital, the entertainment tax on movies is 40%. But that tax rate is just 15% in the southeastern state of Tamil Nadu, he said. "After the GST, these tax rates should become uniform," Jain said.

States also currently may drop the entertainment tax on a case-by-case basis. In Uttar Pradesh, where this tax is up to 40%, some recent Bollywood movies shot in the northern state were exempted from the levy in a bid to promote filmmaking in the region. Under GST, a person will pay only one tax, divided between the central and state governments, Jain said.

Political integration complete

India attained independence from British colonial rule in 1947. British India was divided into "British Indian Provinces," directly under British government control, and the "Princely States" -- which had some control over internal affairs provided they accepted British supremacy. These linguistically, culturally and religiously diverse Princely States numbered about 565 and covered one-third of the British Indian Empire and 25% of its population.

After the British left, most of these Princely States integrated with India. But the 26 small states that were within the present-day eastern Odisha state and the 15 within the central state of Chhattisgarh reflect the country's diversity. Even today, each state appears to be operating like a "kingdom," setting regulations and tax rates. And trade between states still resembles importing and exporting, with tariffs imposed.

This history creates difficulties for any government to unite all Indian states on a major issue such as the GST, but the Modi administration appears to have succeeded. About a dozen of India's 29 states are ruled by Modi's BJP or its allies. The bill approved by Parliament requires ratification by at least 16 state assemblies, and the government is hopeful it will happen within a month.

Chhattisgarh Chief Minister Raman Singh said the passage of the GST bill in Parliament concludes the process of political integration begun after India's independence by also forging the economic integration of India.

Ease of doing business

India's current indirect-tax regime involving multiple levies and complex, time-consuming procedures poses a major hurdle for foreign companies looking to invest, especially in manufacturing. Modi's ambitious "Make in India" initiative aimed at turning the country into a manufacturing hub is expected to benefit from the GST.

The GST reform "could certainly boost India's appeal to multinationals, including Chinese firms, as a myriad of existing federal, state and interstate levies in the country had previously increased their tax burdens and barred them from further exploring potentials in the world's fastest-growing major economy," China's state-run Global Times said.

"China is more likely to see this reform, which aims to make India a better destination for investment, as an opportunity rather than a threat," the publication said.

Swedish furniture company Ikea, which is opening retail stores in India, and fashion brands such as Gap and H&M also are expected to gain from the GST, which will reduce prices for consumers. Passage of the bill "is a positive step," Ikea India spokesperson Nivedeeta Moirangthem told the Nikkei Asian Review. But the impact on the company will be known only when the GST is implemented, she said. The Modi government is hoping to roll out the GST from April 2017.

Japanese brokerage Nomura said in a report last month that the GST is seen as benefiting sectors such as autos, cement, consumer durables, fast-moving consumer goods and logistics. But the change could hinder services facing a higher tax burden of 17-18%, up from the current 15%. In the auto sector, stocks of companies such as Maruti Suzuki IndiaHero MotoCorpMahindra & Mahindra and Bajaj Auto stand to gain.

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