Asian Development Bank president Takehiko Nakao termed the roll-out of the Goods and Services Tax (GST) as an important reform achievement of the NDA government, but suggested that its implication could be a challenge on account of several factors — especially the multiplicity of tax rates.
While he commended the government’s resolve to push forward with reforms in several areas, the ADB chief said India must put more energy into reforms of its labour and land acquisition laws as well as regulations governing foreign direct investment so that the economy can grow faster than countries like China on a sustained basis.
Speaking to reporters after meeting Finance Minister Arun Jaitley in the capital, Mr. Nakao said the impact of GST on the economy is difficult to gauge at this stage but its biggest benefit would be the integration of the Indian economy into a single market.
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“There are many different views about GST because of so many tax rates, for instance. So its application is a very important challenge. From my experiences in Japan, when we introduce a new tax, especially such an advanced instrument of taxation like GST, sometimes businesses have to think about pricing based on the new tax burden,” he said.
Arriving at an effective pricing strategy in the GST era would be the most critical challenge for businesses and would impact their profitability, the ADB chief pointed out.
“Some businesses can enjoy a reduction of tax burden from the previous multiple taxes to the GST, but there are also services or other businesses which would have a more tax burden. So how businesses can adjust to the new tax arrangement by pricing is one big issue. If they cannot shift the tax burden properly, they must reduce their profit,” he explained.
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The multiplicity of rates India has opted for the GST, would also be a challenge for officials as well as businesses.
“There is the tax on the output and the tax credit on input, but there are so many different tax rates so how to apply different rates to different commodities and services for output as well as input, is an issue,” Mr. Nakao said.
The dual tax enforcement structure India has adopted – whereby both States and the Centre would be in charge of enforcement – could be problematic too, he said, mooting a clear arrangement that doesn’t make compliance difficult. “There can be some transition issues,” he concluded.
Committing to raise the Bank’s financing activity for Indian projects from $3.1 billion last year to a range of $3 billion – 4 billion each year for the period 2018 till 2022, Mr. Nakao said it is time for India to take advantage of its young working age population by inviting more investment from within and outside the country.
“Labour rules still need rationalisation, regulations for FDI should be further reformed. Land acquisition is a very politically difficult issue, but I hope the States and authorities will address it. It is improving but there’s still room to do more, especially for foreign investors,” he said.