New tax regime a big step forward for India but its execution will be challenging

By Wang Jiamei Source:Global Times Published: 2017/7/2 20:08:39

The long-awaited Goods and Services Tax (GST) finally took effect in India on Saturday, marking the country's biggest tax reform since its independence in 1947. The main questions now are whether the new tax regime can be effectively instituted across the country's 29 states and how long it will take.

First proposed in 2003, the GST will replace a tangle of state and federal taxes and unify the country into a single market. Indian Prime Minister Narendra Modi said in a speech on Friday that the new tax regime is "a transparent and fair system that prevents generation of black money and curbs corruption," adding that it could also remove trade imbalances and promote exports.

It goes without saying that the GST is a big step in the right direction, and is expected to bring long-term benefits to the country's economy. Prior to the launch of the GST, duties and taxes were levied at different rates in different states, adding to the difficulties and costs of doing business across India, especially for foreign-owned companies.

Of course there is still a long way to go before the grand tax overhaul can be fully implemented, and significant disruption in the tax regime can be expected in the short term.

Many businesses are still confused about what to charge, and have complained about the complications of the new policy. According to media reports, the GST rule book has more than 200 pages and last-minute changes were even made on Friday. With rates still unclear for many goods, there have been calls in the country for more time to prepare for the new tax regime.

Moreover, given the size and diversity of India, there is a question about whether the tax reform can be accepted in all the states. While some states may readily follow the federal government's lead and switch to the new tax system relatively smoothly, it could be difficult to implement the new policy in other states, such as those with underdeveloped technical infrastructure.

With demonetization and the GST, India has been pushing forward with drastic reforms to unify the country's economy, and there will inevitably be considerable obstacles. A forceful leadership, which enabled China to implement policies effectively to achieve rapid economic development since the reform and opening-up, is exactly what India needs to ensure full compliance with the reforms throughout the country. Given the fragmented market conditions, the country still lags far behind China in terms of policy execution.

The author is a reporter with the Global Times.


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