Trump might be eyeing a tax overhaul in the US, but here’s why GST is more important

More than one billion consumers, 29 states, 22 official languages, and nine million businesses; bringing all of these together under one tax regime doesn’t sound easy and rightly so, since goods and services tax (GST) was indeed a daunting task for the Indian government and PM Modi.

Also read: Here’s how difficult the GST process was for the Modi government

As India gears up for a July 1 GST rollout, one should take into consideration the 10-year battle in convincing powerful state governments and the restless opposition.

"It has been a huge challenge with countless man hours," Anita Rastogi, Partner (indirect taxes) at PwC told Bloomberg. "The July 1 target is looking feasible. And the effort that has been put in is worth it because this will lead to greater tax compliance and better efficiency."

Here are some of the challenges and potential rewards that the country would get from GST.

Scale
After the implementation of GST, India will create one of the world's biggest free trade areas, replacing at least 17 state and federal taxes on varied categories of products ranging from electricity to makeup. It has to be implemented at a large scale, ranging from Uttar Pradesh, the population of which is similar to the size of Brazil, to Goa, the tiny seaside region in India’s western part. All of these states have their different tax regimes, all of which would be broomed below the GST carpet.

Logistics
The government has decided to keep aside about 28 billion rupees ($435 million), which would be spent to set up a network over the coming five years. This network would be able to handle invoices worth 36 billion rupees a year, for which more than 61,000 government officials are being trained.

Rates
GST would comprise of four basic tax rates of 5%, 12%, 18% and 28%, for different categories of products. While mass consumption items (like spices) would most likely attract a 5% rate, processed foods will attract a rate of 12%. The 18% bracket would see household goods like soaps, toothpaste, and smartphones, and other durable goods like air conditioners will fall under the 28% bracket. Luxury goods, like tobacco, luxury cars and alcohol will be taxed at even higher rates, and collections at these higher rates will go to a fund to compensate states for revenue losses.

Inflation
While some analysts are of the view that GST could increase inflation because of higher taxes on some goods, some economists give examples of countries like Australia and New Zealand that experienced a fleeting increase in inflation after GST implementation but normalized within a year.

Impact
When the tax regime is implemented, companies will of course face one-time costs in switching to new systems. This could also result in some disruption of activity, but analysts still expect that economy would benefit over the longer run. A huge single market would also attract more FDI into India, which is in need of capital investments.