India growth GST reform facing compromises

India’s long-trumpeted replacement of its antiquated VAT regime with a new Indian Goods & Services Tax (GST) is now facing major compromises to secure its 2016 implementation. This may lead to a delay in the hoped for boost in GDP.

India has a range of consumption taxes that overlap, causing double taxation, and which also place a high administrative burden on companies. In particular, the taxes on goods movements across intra-state borders with limited opportunity for recovery undermine the reformist Modi government’s plans for an effective single marketplace.

GST should replace this myriad of taxes, including Indian VAT, CENVAT, Service Tax and Professional Tax. However, in order to win acceptance from the 30 States, a number of compromises have been introduced in recent months:

1. Instead of unification of Central and State consumption taxes, GST will have dual taxing rights on the same transactions
2. Work has yet to be completed on the clearing system for intra-state tax charges
3. The Centre has guaranteed to underwrite substantial tax losses by the States which will undermine the aim of increasing the tax base
4. States have no expertise for the taxation of services, and identifying tax points or have to capture value added calculations