GST woes: India ends up with one of the most complex and highest tax rates
16 March 2018
India’s new unified Goods and Services Tax, which subsumed a web of central and state levies in an effort meant to make life easier for businesses, is one of the world’s most complex, and it also has the second highest tax rate in the world, according to the World Bank.
There are only five countries in the world including India, which have four or more tax rates of GST, according to the World Bank’s bi-annual India Development Update. Most countries have either one or two rates. Other countries with four or more rates are Italy, Luxemborg, Pakistan and Ghana.
And Indian GST’s top slab of 28 per cent is the second highest of the 115 countries that World Bank compared.
India’s landmark tax reform was off to a chaotic start in July after nearly two decades of efforts. A GST council, comprising central and state finance ministers, deliberated over the rates and the mechanism of implementation over numerous meetings.
The tax overhaul brought along some teething issues and disruptions. Dealers stocked up on inventory and reduced production, pulling down growth to a three-year low. Those issues have since gradually abated and the economy has recovered, but revenue collections have taken a hit. India missed its fiscal deficit target this year, which the finance minister said was because it had to work with 11 months of tax revenue as GST is collected with a month’s lag.
The World Bank said India’s threshold for GST registration is also the highest. Businesses with an annual turnover of Rs1.5 crore fall under the GST regime and are eligible to get input tax credit.
Those with annual sales below that and over Rs20 lakh are allowed to pay a flat tax rate of one per cent but can’t charge GST on sales or receive tax credits.
GST’s coming has also been accompanied by state administrations experiencing disruptions, the World Bank added. “This included a lack of clarity on discontinuation of local taxes; demands for exemptions or lower tax rate; and on account of coping mechanisms to preserve revenue collections.”
There have also been reports of an increased administrative tax compliance burden on firms and a locking up of working capital due to slow tax refunds, the World Bank noted.
High compliance costs are also arising because the prevalence of multiple tax rates implies a need to classify inputs and outputs based on the applicable tax rate.
While teething problems on the administrative and design sides persist, the introduction of GST should be “considered as the start of a process, not the end”, said World Bank. The economy is adapting to the new system, and the GST Council has been evolving the tax structure.
“While international experience suggests that the adjustment process can affect economic activity for multiple months, the benefits of the GST are likely to outweigh its costs in the long run.”
The key to GST’s success, according to the World Bank, would be a policy design that minimises the compliance burden by reducing the number of different rates, limiting exemptions and simplifying laws and procedures. A nuanced communication campaign, it said, is also crucial to convey the various aspects of the new tax regime to businesses.