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India: doing business is getting easier thanks to an important fiscal simplification

The Government aims to Increase domestic consumption and attract international investors

indian-parlAn important new law passed by the Indian Government for the country’s economic growth. On 3rd August, the Upper House of the Indian Parliament passed the GST Bill (Good and Services Tax, i.e. a tax on goods and services), which appears as one of the largest legislative reforms passed in India after the opening of the economy in 1991. The current Finance Minister, Arun Jaitley, has announced that the new law will enter into force from 1st April 2017, in conjunction with the new fiscal year.

It’s a measure already proposed for the first time in fiscal year 2006-2007, but in that occasion there were some difficulties and the law did not enter into force; ten years later the Modi Government, after eight months of difficult negotiations, managed to get it approved, reaching an important goal.

The GST will be very important for the Indian economy. Specifically, through the implementation of this reform, the Government intends to replace all indirect, local and central existing taxes (including Excise Tax, Sales Tax and Service Tax) with a single lower fee, the GST: in this way the implementation of the necessary fiscal supervisions will be easier, discouraging tax evasion.

But how does it work from a practical point of view?

The GST is configured as a consumption tax, and it will be applied to goods and services in the moment of final consumption: it will be included in the price of value-added goods and services, in every single step of purchase or sale of assets during the entire production chain. The manufacturer, the wholesaler or the retailer will pay this tax, which may, however, be refunded because is subject to tax deduction; it will therefore be the final consumer the one who actually will pay the tax. This mechanism prevents the “cascade effect” of taxation, in order to avoid paying taxes on taxes.

The aim of New Delhi is to create uniformity: GST will be the same for all goods and services, then the Central Government and all the Indian states will tax goods and services with the same levy. For example, if 20% is the percentage chosen for a certain good, the Central Government and all the states will collect both the 10% and the income will be divided between the two parts.

It was calculated that the effect of the introduction of the GST could lead to a reduction in prices of 16%: this will result in an expected increase in consumption and employment and an increase in foreign investment.

This is the procedure required by the Government for the definitive implementation of the law:

  • The approval by the Assemblies of the Federated States of India. Currently, eight states that have already approved the law (Delhi – NCR, Madhya Pradesh, Assam, Bihar, Jharkhand, Chhattisgarh, Gujarat and Himachal Pradesh) and now it will be necessary that the Legislative Assembly of each State approves its proposal of law regarding the GST, since each State can take internal decisions;
  • The constitution of a special committee for the GST, i.e. a counsel which will decide about the measures taken in relation to taxation, rates and exemptions.

The Modi Government, after the “Make in India” campaign and the measures included in the last Union Budget, continues  in its strong path of economic change of the country, with the aim of creating an ever more open and dynamic environment for the business. The implementation of that huge reform will support the economic growth and the increment of domestic consumption, and it will simplify the commercial relations with foreign countries, attracting many international investors.

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