India sales tax: super hero

Posted on August 7, 2016

India’s parliament, which has passed a bill aimed at unifying the country’s tax system

India’s tax man is about to get smarter. On Wednesday the country’s parliament passed a tax bill aimed at replacing its fragmented sales tax scheme with a unified, transparent system. About time, too.

    Today’s system is complicated, and inconsistencies abound. Services are taxed by the central government, which also levies excise taxes where goods are produced. India’s states, meanwhile, tax sales of goods within their boundaries, and also collect levies on interstate goods sales on behalf of the central government.

    Tax cascades — taxes based on prices that have already been taxed — compound the cost to the consumer. For goods made in India, 25 per cent of final prices is accounted for by tax.

    Under the new system, taxes as well as tax credits travel across state borders. This should make the proposal more fraud-proof than the current EU system of value added tax collection, which is losing €50bn a year from fraud on cross border transactions.

    India’s tax rates will still have to be negotiated before the implementation date next year but, in many countries, they are lower than 20 per cent. Services are currently taxed at a central rate of 14 per cent. This could mean that, on balance, final prices for services might increase, while prices for goods could decline.

    Gross domestic product should benefit from the reduced deadweight losses. Analysts expect 0.9 to 1.7 per cent of additional GDP growth after a few years. The government expects a broader tax base, higher compliance and higher revenues.

    Companies with complex manufacturing operations across states should benefit most. They suffer the most under the inefficiencies of the current system and tax rates levied on their products are likely to fall more than other sectors’.

    An unusual case, when the advent of a more efficient taxman is welcome.

    Email the Lex team at lex@ft.com

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