GST in India will provide opportunities – and bear traps

As the 161st entrant into the GST club, India’s arrival has been an arduous journey. While the reaction of Indian businesses has been overtly positive, there is scepticism with respect to the implementation of an underwhelmingly drafted legislation. Despite these concerns and misgivings, for investors looking at India, GST will provide a simplified and more transparent tax regime at the central and especially state level, lowering investor risk and providing assurance from a business continuity perspective.

The three primary reasons for this are:

• Clarity in tax positions. The federal structure in India permitted the states to take an autocratic approach in what and how they wanted to tax transactions. The high handedness of states resulted in unnecessary litigation, with very little outcome. As a GST would necessitate all states to have almost identical state legislation, the consistency in taxing statutes would be a relief to companies operating across the country and also provide a degree of certainty in tax positions helping to manage risk.
• Easier compliance. Under a GST, theoretically, compliance would increase significantly. By conservative estimates, companies will be required to file almost 61 statutory filings each year. Though this may look daunting, the filings would be iterative and built on disclosure and submissions made by vendors. The significance of this change in compliance cannot be underestimated. Under the present regime, each assessee makes its own filings without any linkages to the other suppliers/customers in the value chain. In cases of disputes, which are common, this results in businesses struggling to establish their bona fides. Under a GST, as statutory filings and disclosures would be built on information supplied from vendors, it would be easier for businesses to address queries and draw upon information within the entire value chain to explain themselves.
• Reduction in hidden tax costs. The Indian transaction tax regime does provide for cross credits between goods and services. However, the regime created an inequality between service providers and manufacturers, with the latter being taxed at a lower rate. With a GST, the disproportionate burden on services will stand corrected, and ultimately this will reduce the tax cost of businesses working in India.

Kabir Bogra is a partner at Khaitan & Co’s New Delhi office