India, which plans to shift to unified goods and services tax regime by 2010, needs to make sure that the change is gradual and manageable rather than causing major upheaval by being excessively radical, according to a PricewaterhouseCoopers report.
Replacing the current arcane system with a more simple and transparent indirect tax regime is a stated policy aim but this has to be balanced against the need to make sure that the change is gradual and manageable rather than causing major upheaval by being excessively radical. While the benefits of establishing GST across the country are clear, the approach is best characterised as evolutionary rather than revolutionary, S Madhvan, indirect tax leader, PwC India said in the report.
He said rather than being a new indirect tax, the introduction of GST will be, in effect, an integration and rationalisation of the existing regimes at both the federal and state levels.
Indias policymakers have recognised that as an increasingly important international market and the destination for considerable foreign investment, India needs to provide a tax regime that, to the greatest extent possible, integrates with the rest of the world, he said.
The global report Shifting the balance the evolution of indirect taxes notes that India always placed a greater reliance on indirect taxes than direct taxes and, if anything, the trend observed in other countries of a move towards a higher proportion of indirect taxes is reversed in India. It has historically been easier to tax the consumption of goods and services indirectly than trying to tax incomes, he added.
Cautioning that VAT systems can be regressive in nature and also potentially inflationary, the report recommends that governments considering the introduction of such systems to enhance global tax competitiveness need to bear in mind measures that will ensure a level of welfare for the lower paid individual taxpayers, including the potential for applying reduced tax rates or even zero tax rates for basic goods and services or those supporting other social aims such as relieving the burden on the elderly or disabled.