India's GST one of the most complex, says World Bank

The Indian system of goods and services tax (GST) is among the complicated ones in the world, with its high tax rates and a larger number of tax rates, World Bank said.

While calling the introduction of GST a historic reform, it said that India's GST system is relatively more complex than in comparable systems in other countries.

"Comparing the design of India's GST system with those prevailing internationally, we note that the tax rates in the Indian GST system are among the highest in the world. The highest GST rate in India, while only applying to a subset of goods and services traded, is 28%, which is the second highest among a sample of 115 countries which have a GST (VAT) system," WB said in its India Development Update for March 2018. India has the highest standard GST rate in Asia, it said.

Most countries around the world, according to the note, have a single rate of GST. While 49 countries used a single rate, 28 used two rates and only five countries including India used four rates. The countries that use four or more rates of GST include Italy, Luxembourg, Pakistan and Ghana.

Thus, India has among the highest number of different GST rates in the world, the report said.

Commenting on the WB note, Anuj Puri, Chairman, Anarock Property Consultants, said, "It's a very wide statement to say that GST is one of the most complex and second highest tax rate in the world. But, it is certain that there needs to be lesser tax slabs as compared to the ones that exist now." said.

The introduction of GST has been accompanied by state administrations experiencing disruptions in the initial days after GST introduction.

"While teething problems on the administrative and design side persist, the introduction of the GST should be considered as the start of a process, 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," World Bank said in the note.

High compliance costs are also arising because the prevalence of multiple tax rates implies a need to classify inputs and outputs based on the applicable tax rate, it said. "Along with the need to apply the correct rate, firms are required to match invoices between their outputs and inputs to be eligible for full input tax credit, which increases compliance costs further," it said.

The note said that while international experience suggests that the adjustment process can affect economic activity for multiple months, the benefits of the GST are likely to outweigh its costs in the long run.

"Key to success is a policy design that minimises compliance burden, for example by minimising 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 programmes and risk-based audit programmes. A nuanced communications campaign is crucial 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," WB said.

GST, introduced July 1, 2017, after more than a decade of efforts, was designed to bring about a common policy and administrative framework for taxation of the supply of goods and services across the entire country while causing minimum tax based restrictions on trade, besides harmonising the rates on goods and services.

The GST has different tax rates – 5, 12, 18 and 28%. Some goods have been given special treatment and there is a special cess on luxury and "sin" goods. For instance, gold is taxed at 3% rate and precious stones at 0.25%. However, alcohol, petroleum products, stamp duties on real estate and electricity duties are excluded from the GST and they continue to be taxed by the state governments at state specific rates.