QuickTake Q&A: How India’s New Tax Might Help Business, Not Hurt

India’s decade-long wait is almost over for a national sales tax that will create one of the world’s biggest single markets. Once fully implemented, the goods-and-services tax, known as GST, will go a long way toward fulfilling Prime Minister Narendra Modi’s pledge to make it easier to do business in the world’s fastest-growing big economy. The tax will be implemented in stages beginning in the fiscal year that starts April 1, 2017.

1. What’s so good about a new tax?

It will replace at least 17 state and federal levies that complicate efforts to do business across India, a market holding 1.3 billion consumers, about four times the U.S. population. Until now, a good has been taxed multiple times at different rates. The new tax would apply to goods at the point of consumption rather than production.

2. What gets taxed, and at what rate?

The rate will be set by a council that includes the nation’s finance minister, Arun Jaitley, and state representatives. Modi’s top economic adviser and the main opposition Congress party want to cap the rate at around 18 percent, while some states want a higher levy. (Globally, rates for similar consumption taxes range from 5 percent to 27 percent, and the median for OECD countries is about 20 percent.) State governments won an exemption for alcohol, a chief revenue-generating product, and a delay for inclusion of petroleum. The GST Council may also decide to tax certain luxuries -- such as a flat-screen TV, for example -- at a far higher rate than food staples.

3. What will be the economic impact?

The GST could boost economic growth by as much as 2 percentage points, according to Jaitley, India’s finance minister. Greater tax compliance has the potential to boost revenues for the government, helping narrow Asia’s widest budget deficit and allowing more funds to be allocated to schools and highways. Citigroup Inc.’s economists say countries like Canada, Australia and New Zealand saw a one-time increase in inflation after GST implementation, which normalized in a year. Modi’s advisers say the impact on India’s consumer prices will be negligible if the GST rate is capped at 18 percent. If the rate is around 22 percent, then they project inflation to accelerate 0.3 percent to 0.7 percent -- mostly due to education and health services.

4. What will be the business impact?

Companies will have to overhaul their accounting systems, which may involve one-time investment costs. Logistics companies stand to gain as it becomes easier to ferry goods across India. Other winners and losers will be determined by what exemptions are included in the fine print of the GST.

5. What’s next?

The bill amending the constitution has cleared both houses of parliament and must now be ratified by at least half of India’s states, which could happen over the next few months. Once that is done, lawmakers need to introduce at least one more bill detailing the structure of the tax, which includes a state GST and a central GST. The earliest this could occur would be the so-called winter session of parliament that normally starts in November.

The Reference Shelf

Before it's here, it's on the Bloomberg Terminal. LEARN MORE