India is pushing hard to introduce the Goods and Services Tax (GST). After the Indian Parliament passed the law at the beginning of August 2016, both chambers and more than half of the states have now approved the necessary constitutional changes. The bill was signed on September 8 by Indian President Pranab Mukherjee (himself finance minister from 2009 to 2012). This meant that within just a few weeks – and much faster than expected – all the legal foundations were created to introduce the new VAT system.

On September 22nd and 23rd, the “GST Committee” responsible for implementing the tax met for the first time in New Delhi. It must work out the amount and exact functioning of the Goods and Services Tax and clarify numerous technical details.

The GST introduction in 2017 could overwhelm many companies

If this momentum is maintained, it is still possible that the final GST law in India will come into force on April 1, 2017 (the beginning of the Indian financial year). The government has already created the necessary IT infrastructure for the administration and collection of the Goods and Services Tax and is testing it until the end of the year.

If the new tax is actually introduced so quickly, it could catch many companies off guard. The new tax system will be significantly simpler by abolishing many of the taxes and duties that currently exist. Nevertheless, companies would then have to clarify, adapt and implement numerous technical and commercial details within a few weeks under enormous time pressure. Significant changes would need to be made in the following areas in particular:

  • in the ERP and accounting systems
  • in the supply chain: adjustments and new regulations
    • Services within a state
    • Services between two states
    • Imports from abroad to India (possibly also impacting accounting in the parent company)
  • Adjustment of prices and conditions in contracts with customers and suppliers
  • if necessary, new tax registrations

It is in the nature of things that such a major change can lead to confusion and turbulence within your own company.

Modi is putting pressure on India's most important economic project since liberalization in 1991

Very few people are still expecting it to be introduced next year. However, it cannot be ruled out that the planned introduction date will actually be adhered to. For Modi, the GST would be the big success he needs to finally fulfill the high expectations placed on him and his policies. And he could actually implement the mega-project that all governments have failed to achieve in the last 15 years! The GST is probably the largest and most important tax reform in India in recent decades.

The Goods and Services Tax will replace a majority of all indirect taxes, such as

  • the nationwide Central Sales Tax (CST),
  • a separate Value Added Tax (VAT) per state
  • so-called octroi taxes in some cities,
  • an Excise Duty on the production of goods,
  • and a service tax on the provision of services.

This would finally create a nationwide, uniform VAT system that was long overdue.

A unified GST in India would also have a huge positive impact for foreign investors. The current complexity of domestic taxation of goods and services would be simplified and would be much easier to understand in the future.

Economic researchers expect additional growth of up to 2 percent through the introduction of the uniform VAT. A timely introduction and the expected positive economic effects would probably secure Modi's re-election in 2019. Therefore, he and his government will certainly do everything possible to implement this project as quickly as possible.

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