India’s Major Tax Reform Approaches, Many Companies Unprepared – Reuters

By Manoj Kumar and Douglas Busvine

In New Delhi, the longstanding political deadlock surrounding India’s major tax reform appears to be shifting as businesses brace for the potential implementation of a new Goods and Services Tax (GST) next year.

This sudden urgency comes as the Indian parliament is expected to vote on a key constitutional amendment that will address critical aspects required for establishing a unified market across the nation’s $2 trillion economy and 1.3 billion consumers.

The amendment is likely to pass in the upper house, following negotiations between the ruling government and the opposition Congress party, which initially proposed the GST during its tenure. However, this vote will only initiate a complex legislative process that requires both the national parliament and India’s 29 states to approve additional laws that will outline the specifics of the tax, including its rate and scope.

In addition, a robust IT system has to be developed, tax officials must receive training, and businesses need to adapt their operations to comply with what experts believe will necessitate comprehensive changes in their processes.

G.R. Ralhan, the head of Roamer Woollen Mills in Ludhiana, expressed concerns about the readiness of smaller companies for such a significant change. He emphasized the need for more time to adjust, warning that a high GST rate could threaten his business’s viability.

Countries that have implemented GST systems in the past often experienced periods of economic slowdown before realizing the advantages of a unified tax approach. Currently, India is the world’s fastest-growing major economy, with a year-on-year growth rate of 7.9 percent in the March quarter. Economists from HSBC predict that the GST could enhance growth by 0.8 percentage points within three to five years.

Tax experts note that only about 20 percent of mostly larger firms are preparing for the GST, while the majority are taking a wait-and-see approach, accustomed to the ongoing changes in the tax landscape.

For companies actively preparing, uncertainties remain as parliament addresses the task of converting a "model" GST law into actionable legislation. The initial challenge will be for a majority of state parliaments to approve the GST amendment, which will create a GST Council responsible for defining key tax elements.

This process could extend until November, meaning that the necessary legislation might not be presented before the winter session of the national parliament, raising doubts about the government’s goal to implement the GST by April 1—coinciding with the start of the fiscal year. Experts suggest the actual launch date may be pushed to July or even October 2017.

While Prime Minister Modi’s administration prefers an 18 percent GST rate, states are advocating for higher rates. While producers of goods have adjusted to elevated tax rates, service sector companies currently facing a 15 percent tax could either absorb the increase or pass it on to consumers.

"The possibility of a rate exceeding 20 percent would be politically unfeasible; it would likely cause inflation," remarked Harishankar Subramaniam, head of indirect tax at EY India.

Additionally, the lack of clarity regarding taxation on transactions raises concerns among telecom, financial services, and e-commerce sectors. Amit Kumar Sarkar, head of indirect tax at Grant Thornton, articulated the anxieties of service companies towards the GST, comparing it to a potential threat.

For Modi, the critical question is whether the anticipated economic benefits will materialize in time for his expected campaign for a second term. If the tax system stabilizes, it would allow Modi to tout the passage of what could be seen as India’s most significant tax reform in history.