China VAT and India GST rivalries

2016 will go down as the year that the world’s two most populous countries pushed ahead with fundamental indirect tax reforms to boost their internal markets and global rivalry.

It is worth contrasting the reforms to see how the implementation of GST and VAT reforms for India and China respectively will work to understand their future ambitions.

India’s amended its constitutional this month to role out a Goods and Services Tax in 2017 or 2018. It will replace a plethora of overlapping and bureaucratic indirect taxes including: CENVAT, VAT, Service Tax, internal customs levies and Professional Tax. In particular, the new GST sales tax will remove compounding tax on goods being moved across internal state borders - effectively creating an internal customs union. This will promote the country's lagging manufacturing sector, and help boost it on the global stage against China’s dominance. India’s GST tax could deliver an additional 2% GDP growth per annum.

China’s VAT reforms, started in 2012 and completed in May 2016, reformed its Value Added Tax regime and swept away its conflicting Business Tax system. The latter imposed cascading taxes on service companies discouraging their development and undermining the country’s ambition to promote its domestic consumption. The simplification of Chinese consumption tax is estimated to cost the country $75 billion per annum, but will help promote supply chains, outsourcing and R&D expenditure. Small companies should see their tax bills drop from 5% to 3%. However, it will place an additional burden on some services sectors, including telecoms and financial services. Local authorities, which previously relied on Business Tax, have also lost out, forcing them to sell major tracts of land which has contributed to the bursting of the Chinese real estate price bubble.