India's GST among the most complex globally, simplification key to its success: World Bank report

Multiple rates, high peak rate and a slew of exemptions have made India's Goods and Services Tax (GST) rates one of the most complex in the world, notes the World Bank. The India Development Update, the biannual publication of the World Bank released in Delhi on March 15th says that the country's 28 per cent GST rate - the highest of the four non-zero slabs - is the second highest among a sample of 115 countries that have a GST (VAT) system. India has the highest standard GST rate in Asia.

In terms of complexity, Indian GST system currently has 5, 12, 18, and 28 per cent rates while most countries around the world have a single rate of GST. The World Bank report points out that 49 countries use a single rate, 28 use two rates, and only five countries - India, Italy, Luxembourg, Pakistan and Ghana use four rates.

The report also says that in addition to the number of rates, the extent of exemptions and sales at a zero rate adds to the complexity. "While exemptions allow easing the tax burden on items with a high social value, such as healthcare, they also reduce the tax base and compromise the logic of the GST as they can. It reintroduces cascading where an exempted good or service is an input into another taxable good or service, create incentives for vertical integration to keep the exempt status, and raise compliance costs by making it necessary to allocate input taxes between exempt and non-exempt output when manufactured or traded together", the report says.

The Bank also stated that in contrast to other GST design parameters, comparing the prevalence of exemptions across countries is challenging. "This is because the impact of declaring various goods as zero-rated does not only depend on the number of products exempted, but also on the revenue generated from each product. The latter figure is difficult to assess in the absence of tax revenue figures. Hence an assessment of the role of exemptions in the Indian GST system cannot be made before revenue figures have stabilized", it said. The bank also highlighted the registration threshold for GST as another important policy parameter.

India's 'composition scheme', where businesses below a certain threshold pay a (lower) 'flat' turnover tax and are not allowed to collect tax as well as claim input tax credits is a practice that exists in several countries. "Such schemes for SMEs under the GST also exist in other countries. China and Poland use a similar 'flat' rate scheme. In other simplified schemes, businesses collect taxes on sales just like other registered GST business but can pay the tax as a 'flat' percentage of sales but the input credit is 'deemed' as a fixed percentage of sales. Such countries include the UK, Canada, Austria and Belgium", the report said.

Calling the introduction of GST a historic reform, the report said that while teething problems on the administrative and design side persist, the development should be considered as the start of a process and not the end. "With the economy adapting to the new system, the GST council has been evaluating and evolving the tax structure and its implementation. While international experience suggests that the adjustment process can affect economic activity for multiple months, the benefits of GST are likely to outweigh its costs in the long run", it stated.

According to the Bank, key to success of GST is a policy design that minimizes compliance burden, for example by minimizing the number of different rates and limiting exemptions with simple laws and procedures, an appropriately structured and resourced administration, compliance strategies based on a balanced mix of education and assistance programs and risk-based audit programs.

The Bank also advocated for a nuanced communications campaign to convey the various aspects of the new system of GST amongst businesses, consumers and key intermediaries, such as tax practitioners, as well as amongst the tax administration itself and the political class.