The government, on Friday unveiled four rate bands under a new sales tax for services such as telecoms, insurance and restaurants, a move experts feel could complicate compliance and leave businesses at the mercy of an intrusive tax bureaucracy.
The Goods and Services Tax or GST, set to be launched from July 1, will have rates of 5, 12, 18 and 28 per cent for services, in line with those applying to goods. It is a big departure from the current system, where a single rate of 15 per cent is applied on most services.
The biggest argument in favour of the GST – India’s biggest tax overhaul since independence – is that it would make it easier to do business by simplifying the tax structure and compliance. But the political challenges of striking a compromise between the central government and those in the states and union territories has meant that life will get more, not less, complicated for some.
For example, hotels and restaurants would be taxed on the basis of their room tariff and turnover of business. Air-conditioned restaurants will be taxed at a higher rate under the new system than those without.
“For service providers, it is going to get troublesome,” claims Saloni Roy, a senior director at tax consultancy firm Deloitte Haskins & Sells LLP.
Since services account for more than half of India’s $2 trillion economy, the complexities run the risk of obstructing the sector’s growth. The government, however, defended the move for multiple slabs, saying different economic classes can’t be taxed at the same rate.
Finance Minister Arun Jaitley also played down concerns that higher headline rates would inflate the tax burden on consumers. Since service providers will get tax input credits, he said, the effective tax rate will be lower. “The actual incidence on consumers will go down,” Mr Jaitley told reporters after a two-day meeting with finance ministers of various states.
Under the new system, while healthcare and education services will be exempt from tax, services offered at five-star hotels will be taxed at 28 per cent. Telecoms and financial services will be taxed at a standard rate of 18 per cent. An industry group representing mobile operators claimed that this would further bleed a sector still smarting from a price war triggered by the aggressive market entry of Reliance Jio.
“This is likely to slow down the planned roll-out of infrastructure,” Rajan S. Mathews, director general of the Cellular Operators Association of India said.
A NEW INSPECTOR RAJ?
The long-awaited GST will replace a slew of federal and state levies, seeking to transform India’s 1.3 billion population into a single market. The measure has also been touted as the biggest reform undertaken by Prime Minister Narendra Modi to transform India into a business friendly destination.
While it will make lives easier for manufacturers and traders as “cascading” taxes on top of taxes through the production process would be done away with, compliance for service providers may become onerous. In place of a single registration, they will be required to register in every state where they do business.
There is also a risk of overzealous tax inspectors becoming more intrusive as the GST has an “anti-profiteering” provision to ensure companies pass on the benefit of input tax credits to consumers.
Saloni Roy of Deloitte feels that implementing the provision is fraught with risks as it empowers tax authorities to ask for pre- and post-GST cost sheets from companies of their products. “It can lead to the Inspector Raj,” she claims.