India's Historic New Tax System: What your Business Needs to Know

Punit Paranjpe/AFP/Getty Images

Punit Paranjpe/AFP/Getty Images

India introduced the biggest tax overhaul in its post-colonial, 70-year history in June 2017. The new system, called the Goods and Services Tax (GST), replaces a setup made up of more than a dozen federal and state taxes. It will unify the country into a common market with a $2 trillion economy and a population of 1.3 billion people.

What tax changes do businesses need to know?

GST introduces five individual tax bands: 0%, 5%, 12%, 18% and 28%. Businesses will be required to comply with the tax band that the product or service that they offer falls under.

0%: Includes food staples such as milk, fresh fruit, chicken and honey

5%: Includes packaged food items, coffee, and transport services such as rail

12%: Includes work contracts, ayurvedic medicine, and cell phones

18%: Includes IT, financial and telecom service businesses

28%: Includes automobiles, 5-star hotels, and personal care items.

What is the reaction from companies doing business in India?

   Companies doing business
   in India have given a mixed

Companies doing business in India have given a mixed response. Some businesses are worried that they may pay higher taxes, while others, including Mahindra and ICICI Bank, have praised the bill. It is worth noting, that the business community is in a process of change and adjustment to GST, and final outcomes are as yet unclear.

What advantages does GST give businesses?

The biggest advantage that GST is set to bring is increased ease of doing business. The old tax system was complex, and Indian enterprise has been crying out for reform for years. In fact, GST has been in process for 14 years.

   The biggest advantage that
   GST is set to bring is increased
   ease of doing business.

The government promises less compliance, increased logistics efficiency, and simplified tax procedures. For companies with operations across the country or that span various states, the GST unified system is designed to streamline processes, leading to savings in time and capital.

Companies are predicted to save $14 billion through logistics savings and increased efficiency.

What is the outlook for India's economy?

India's finance minister believes that GST will help the country's economy to grow by 2%, but some sources estimate a more modest, but still considerable, 0.4% positive impact.

Economic analysts have blamed one-off factors, including the country-wide demonetization program in 2016 and the adjustment to GST, for disrupting the country's economic growth trajectory. However, they do forecast strong economic growth for India, and that it will increase over the next two years. Financial ratings firm Fitch said, "Recent moves by the government should help support the growth outlook and enhance business confidence." The country's growth outlook points to a period of consistency for the Indian rupee (INR). Furthermore, the sheer scope of GST demonstrates to investors what India is capable of in order to improve its economy. This further instills confidence, which in turn points to consolidated strength for the rupee. USD however continues to benefit from positive job additions to the economy, although wage pressures remains low. The US's own tax overhaul has also helped the greenback to strengthen and expected interest rate hikes will likely continue USD strength. INR will likely fluctuate modestly for the most part against USD into 2018.

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The final word

All in all, GST is a tax overhaul that is monumental in scope, designed to make India a more efficient economy. The outlook for corporations in India, or doing business in India, is promising. Speed and ease of doing business will increase considerably, eliminating much of the frustration that has been a part of doing business in India. Furthermore, it is widely expected to boost the wider Indian economy and attract foreign investment, which is good news for companies from all sectors.

India was already one of the most attractive developing markets in the world, with a burgeoning middle class and strong growth indicators. GST will likely help it become an even better market to conduct business.