The introduction of the much talked about Goods and Services Tax (GST) Bill is a landmark achievement for the Narendra Modi government. Many analysts regard this as one of the biggest economic reforms undertaken by the Indian economy after the liberalization reforms of 1990. GST in simple words is a tax regime which subsumes all indirect taxes such as sales tax and excise tax with an intention to unify the nation into a common economic market. India is not the only country to have such a tax regime. France was the first country to implement GST to reduce tax-evasion. As of date, more than 140 countries have implemented GST. Most countries have a single unified GST system i.e. a single tax applicable throughout the country. However, in federal countries like Brazil and Canada, a dual GST system is prevalent whereby GST is levied by both the federal and state or provincial governments. In the Indian context, the empowered committee of State Finance Ministers and Thirteenth Finance Commission suggested for a dual model of GST under which the central taxes will be replaced by central GST and state taxes by state GST. The administration of both the taxes will be borne by the Central and State revenue authorities respectively.
For the Indian economy, GST is touted to be a crucial step towards facilitating the country’s development trajectory. This reform is expected to ease India’s cumbersome and complicated tax system, facilitate seamless movement of goods across state borders, curb tax evasion, improve compliance, increase government revenues, spur growth, boost exports and attract investments by improving ease of doing business in India. While GST will have an impact on several areas, the objective of this article is to briefly analyze its possible impact on India’s foreign trade and investment.
Seamless Interstate Transportation
The implementation of GST eliminates the need for goods to be taxed each time they cross a state border. Entry tax such as octroi and central sales tax (CST) have been abolished. This automatically eliminates the need for vehicles carrying goods to stand for long hours at inter-state check posts for inspection and payment of taxes. According to World Bank (2014) report, within taxes, the CST payment used to take 105 hours and the rate constituted 14.5 per cent of company’s profits. Lorry drivers in India lose 60% of transit time to road blocks, tolls and other stoppages, which means logistics costs are up to three-times higher than international benchmarks. According to the estimates of the World Bank, halving the delays due to roadblocks, tolls and other stoppages could cut freight times by 20-30 per cent and logistics costs by 30-40 per cent. Improvement in transaction costs and timing of trade will play an important role in boosting the country’s competitiveness.
Following GST, as per media reports, border commercial tax check posts have already been abolished in 22 states, including Andhra Pradesh, Bihar, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Tamil Nadu, Sikkim, West Bengal, Delhi, Haryana, Odisha, Rajasthan and Uttar Pradesh. All these steps would facilitate seamless flow of goods and services across 29 states and 7 union territories’ of India.
Under GST, every import will be treated as an interstate supply, and will be subject to Integrated Goods and Services Tax (IGST) along with Basic Customs Duty (ranging between 5% and 40% depending on the good imported) which is levied as per the Customs Tariff Act. IGST replaces the previous indirect taxes imposed on the import of goods and services and will be levied in the state where the imported goods are consumed and imported services are received.
Export of goods will be treated as zero-rates supply. No GST will be charged on exports either at the input stage or at the final product stage. Implementation of GST will mitigate the cascading effect of multiple taxes under the current system. The facility of input tax credit will be available to exporters even in the case of SGST, which was not available in the earlier tax regime. Simply put, an input tax credit implies that while paying tax on the output, one can reduce the tax that has already been paid on inputs. Thus, an exporter need not pay the same tax twice, and now has to pay tax on the value addition done. This step is intended to give Indian exports a boost and is in line with the government’s “Make in India” campaign.
With reduced time and cost inefficiencies, Indian exports will become more competitive in the global market. Implementation of GST has led to increase in exports in other countries as well. For example, New Zealand implemented GST in CY1986 and saw it exports jump from $5,880 million in CY1986 to $7,195 million CY1987, a growth of 22.36%.
A report prepared by NCAER (2009) for the thirteenth finance commission, provides estimates for the gains that will be accrued on India’s trade upon implementation of GST. The report estimates that gains in exports can be expected to vary between 3.2 and 6.3 per cent with corresponding absolute value range as Rs. 24,669 crore and Rs. 48,661 crore. Imports are expected to gain somewhere between 2.4 and 4.7 per cent with corresponding absolute values ranging between Rs. 31,173 crore and Rs. 61,501 crore. The sectors with relatively high proportional increase in exports include textiles and readymade garments; beverages; industrial machinery for food and textiles; transport equipment other than railway equipment; electrical and electronic machinery; and chemical products: organic and inorganic. The major import gaining sectors include leather and leather products; furniture and fixtures; agricultural sectors; coal and lignite; agricultural machinery; industrial machinery; other machinery; iron and steel; railway transport equipment; printing and publishing; and tobacco products. While these figures may be dated, they provide an indication of the vast potential gains that implementation of GST can have on India’s trade.
Ease of Doing Business
India fares poorly in the Ease of Doing Business Index. In 2017, it was ranked 130 out of 189 countries. One of components of this index calculation is the simplicity of the tax structure of a country. Under the sub-heading of “paying taxes”, India is ranked 172 out of 189. This is a dismal rank. The ranking is calculated on several indicators such number of taxes paid, hours per year spent preparing tax returns and total tax payable as share of gross profit. The dismal ranking can be attributed to India’s uncertain and unpredictable indirect tax regime. Indian tax regime historically has been based on a plethora of taxes that are levied by various levels of government. There have been instances of multiplicity of taxes which increase the tax rate in India making it an expensive tax regime. The complications and lack of consistency in the tax regime has often dissuaded foreign investors from entering the Indian market. How can one forget the infamous Vodafone case on retrospective taxation and the negative impact it has on India’s reputation as a foreign investment destination?
GST is expected to address these concerns by removing multiplicity of taxes and by establishing a simple and easy to comprehend structure. Hopefully the implementation of GST will improve India’s ease of doing business ranking and help the country attract increased inflows of Foreign Direct Investment.
With only two months into implementation of the GST, one is yet to witness the results on the Indian economy. In order to reap the fruits of this reform, it is utmost important that the government takes adequate steps to support the implementation of this reform. GST has to be supported and serviced by state-of-the-art technology. Infrastructure up-gradation will be a key in achieving the desired results. Understanding the intricacies of GST is not easy. There is still a lot of confusion amongst stakeholders regarding filing of taxation. This has fuelled increased demand for skilled personnel with GST subject knowledge. Awareness programs need to be held. Training needs to be imparted. Clear guidelines need to be uploaded. There are challenges and what remains to be seen is how quickly we can overcome them. The simplification of the most complex tax system is after all not that simple!
 NCAER (2009). Moving to Goods and Services Tax in India: Impact on India’s Growth and International Trade December 2009 Prepared for the Thirteenth Finance Commission Government of India.