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India is expected to move to a single so-called goods and services tax (GST), effectively doing away with the plethora of taxes that currently exist. This is expected to make the tax regime transparent, widen the tax net and shift taxation from point of origin to point of sale.

“Whatever the exact contours of the tax may be, one thing is clear: it will be more seamless than the current tax system. But the question is, to what degree will it be? We are looking at a tax regime that is more user-friendly and easy to comply with,” says Ernst & Young Director, Global Tax Advisory Services, Vivek Mishra.

According to Mishra, this does not mean that entrepreneurs and business-owners need to get accustomed to a new set of rules. “For a businessman engaged in any kind of business, for all the services that he receives and all the goods that he buys—subject to specific exclusions—he can take the credit
for it and offset it against his liabilities,” he says.

So what impact would this new system of taxation have on pricing? Mishra says no one can tell until the rates are disclosed and we are much closer to the date on which the GST will come into effect.

“There are a couple of parallels between [what’s happening now] and the time when Value Added Tax (VAT) [was introduced]. Until March 31 or April 1, 2005, no one knew if the tax would be deferred, as it was postponed a couple of times before. The same happened with transfer pricing on the income tax side. The sections came out first and many months later the rules and regulations were released; people waited till these specific rules came out,” Mishra recalls.

In hindsight, it seems now that it was the correct approach, because if one would have done something in the first instance, it may have not complied with the rules and regulations.

Unlike VAT, however, there is one huge complication in the introduction of GST—the amendment to the constitution. “In the VAT regime, the constitution did not have to be amended and Haryana went into VAT one year before. For GST to become a reality, draft acts need to be released for invitation of comments. Then, a presidential nod is required. So there are a number of steps [that need] to be taken, apart from the design of the new regime,” says Mishra.

From what is known, certain sectors which are out of the tax net—such as medicine/healthcare, education and agriculture services—are likely to be taxed in some form or the other. “However, organized players will find that they have not lost out. Schools, for example, will find that they have to charge GST on the tuition fees, but they can take credit on a whole bunch of services they procure. So, it is only the value added part that gets taxed,” explains Mishra.

So, what can a businessman or entrepreneur do now as we await the implementation of the new tax system? “It’s too early to do anything now,” says Mishra. “One only needs to be aware of the changes that are taking place. It will promote simplification and drive out grey market elements into the declared category.”

©Entrepreneur September 2009

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Ernst & Young, Global Tax Advisory Services, goods and services tax, GST, tax, Value Added Tax, VAT, Vivek Mishra