Automakers hope Narendra Modi ditches Byzantine tax system for GST
May, 27th 2014
Indian carmakers, battered by two years of slowing sales, hope the resounding election victory by India's new leader will spur replacement of the country's complex array of duties with a simple goods and services tax (GST).
Investors, too, are rooting for this and many other reforms from Prime Minister Narendra Modi's government. Enacting a GST faces significant hurdles - including approval by the upper house of parliament, where the Bharatiya Janata Party (BJP) lacks a majority. But Modi favours GST and the Congress party has promised to support the measure even when in the opposition.
Tax greatly drives up the cost of buying a car in India. By the time a new Maruti Suzuki SX4 sedan is driven out of a showroom, the buyer has paid taxes that equal about 50 percent of the vehicle's basic price.
The burden can include a tax for moving the car across state lines from the north India factory where it was built.
Indian investors and manufacturers have long coveted GST as a game-changer that would simplify and often lower taxes, broaden collection and spark spending, adding as much as 2 percentage points of growth to Asia's third-largest economy.
"Indian taxation is always a very complex system," says Ajay Seth, chief financial officer of Maruti Suzuki India Ltd.
"I think (GST) will be a significant help."
India's Byzantine taxation system and inconsistent collection pushes up costs and deprives the government of revenue.
In an indication of how tax collection is a headache, a recent World Bank survey on ease of doing business in 189 countries ranked India 158th for paying taxes - behind war-torn Afghanistan and neighbouring Bangladesh.
V.S. Parthasarathy, chief financial officer at Mahindra and Mahindra, India's largest sport utility vehicle maker, says that if overall rates come down under GST, this would be "a demand booster and it also allows for transparency".
WANTED: SIGNIFICANT REFORM
In India, a typical car buyer ends up paying 26-30 percent of a vehicle's retail price as tax, compared with 16-20 percent in South Korea and Germany, according to ratings agency Crisil.
In Japan, home of Maruti Suzuki's parent, Suzuki Motor Corp , customers pay up to about 11 percent tax on vehicle purchases, which includes the country's 8 percent sales tax and excludes annual ownership levies.
"The whole taxation system in India needs a very significant reform," said Sugato Sen, deputy director general of the Society of Indian Automobile Manufacturers.
In the last, Congress party-led government, two finance ministers wanted a GST enacted, but they failed to get needed support from India's states, which fear losing out on tax collection.
Krupa Venkatesh, senior director in India for auditor Deloitte, said she expects the government to announce "some kind of road map for GST" in its first budget, likely to be unveiled in July.
Credit Suisse predicted that GST would be the first "high impact" legislation taken up by the new parliament.
Still, the idea faces political and procedural hurdles. Even optimists say it would be 2016 at the earliest before GST could take effect.
"While GST is likely to take 3-4 years to get fully implemented, given the long-drawn procedures... even visibility on the implementation timeline should be enough to drive optimism around stocks in some sectors," Credit Suisse wrote in a May 19 note.
A GST system, in its purest form, would make India a single fiscal union for indirect taxes, eliminating the current hodgepodge that includes excise duty, and service, value-added and education taxes.
GST will need the support of two-thirds of both houses of parliament, and the BJP does not hold a majority in the fragmented upper house. Another hurdle is that half of India's states will also need to approve GST for it to become law.
It is not yet clear whether the BJP would win sufficient support for GST, or what compromises and concessions would be needed to do so. Some states want liquor to be excluded from GST, while Modi wants to be sure there is a sufficient information technology network in place to support GST.
In the past, BJP-led states - including Modi-governed Gujarat - blocked efforts by Congress to implement GST.
Crucially, the actual level of tax needs to be agreed. The previous proposal would initially have taxed most goods under GST at 20 percent, split evenly between the states and New Delhi.
Even if India gets a GST, it will not do away with direct taxes, including on transfer pricing, which has been a source of frustration for multinational companies.
A spate of tax disputes involving global companies including Royal Dutch Shell Plc, Vodafone Group Plc and Nokia has dented investor interest and spurred industry calls for tax reform.