The amount of tax entrepreneurs pay and the simplicity with which a country’s tax system facilitates it is an important component in the ease of doing business, as captured every year by World Bank’s
Doing Business reports. Beginning 1 July, as India shifts its indirect tax system to the Goods and Services Tax (GST) and its accompanying infrastructure, the transition is not going to be smooth — it has not been so in any of the world’s 122 jurisdictions. And, the positive or negative impact of India switching to GST will not show up until 2019, and six months after the next general elections.
India’s overall rank in Doing Business 2017 was 130 out of 190, which is bad enough. But among the 11 indicators based on which the report evaluates nations, No 7 is paying taxes. This indicator tracks, “payments, time and total tax rate for a firm to comply with all tax regulations as well as post-filing processes.”
Ranked 172 out of 190 countries in 2017, India stands in the bottom decile here, with The Gambia and Benin as neighbours. The only significant economies (I have used the 19 countries belonging to G20 as sample) whose ranks are lower than India’s on this parameter are Argentina (ranked 178) and Brazil (181).
Going granular, among these 19 countries (the 20th member of G20 is the European Union as a combined entity of 28 countries, of which France, Germany, Italy and UK are also individual members), the 25 tax payments an Indian entrepreneur has to make puts it above only Indonesia’s 43 but well below Italy’s and Japan’s, both ranked 14. She needs to spend 241 hours per year on paying taxes, compared to 67 hours in Saudi Arabia, 105 hours in Australia, and 110 hours in UK. Further, in calculating the total tax rate as a percentage of profits — profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, turnover taxes and other taxes (such as municipal fees and vehicle taxes) — India’s 60.6% is not as bad as Argentina’s 106.0%, close to China’s 68.4% and France’s 62.8%, but not as low as say Saudi Arabia’s 15.7%, Canada’s 21.0% or even South Africa’s 28.8% (See table).
Rankings on Paying Taxes parameter of Doing Business 2017 among G20 countries
| Country |
Rank |
Payments * |
Time ** |
Total tax rate # |
| Argentina |
178 |
9 |
359 |
106.0 |
| Australia |
25 |
11 |
105 |
47.6 |
| Brazil |
181 |
9.6 |
2,038 |
68.4 |
| Canada |
17 |
8 |
131 |
21.0 |
| China |
131 |
9 |
259 |
68.0 |
| France |
63 |
8 |
139 |
62.8 |
| Germany |
48 |
9 |
218 |
48.9 |
| India |
172 |
25 |
241 |
60.6 |
| Indonesia |
104 |
43 |
221 |
30.6 |
| Italy |
126 |
14 |
240 |
62.0 |
| Japan |
70 |
14 |
175 |
48.9 |
| Republic of Korea |
23 |
12 |
188 |
33.1 |
| Mexico |
114 |
6 |
286 |
42.6 |
| Russia |
45 |
7 |
168 |
47.4 |
| Saudi Arabia |
69 |
3 |
67 |
15.7 |
| South Africa |
51 |
7 |
203 |
28.8 |
| Turkey |
128 |
11 |
216.5 |
41.1 |
| United Kingdom |
10 |
8 |
110 |
30.9 |
| United States |
36 |
10.6 |
175 |
44.0 |
* Number per year ** Hours per year # Percentage of profits
Source: Doing Business 2017
The launch of GST, an entirely new tax system and not merely rates, should ensure that it works as a catalyst to doing business. While it is true that no tax system on its own can guarantee businesses are set up or galvanised, the problem in India is a little different. It is not a tax rate or even a system of taxes that gets in the way of doing business; those have mostly been sorted out by moderating tax rates. The real problem lies in the immense powers given to tax officials, powers that have the potential to harass entrepreneurs and drive all enterprise out of her. Nailing a tax evader is one thing, but turning the tax system into a network of tax terror is quite another.
Does the GST help in fixing this?
The one thing going for the GST system is its all-electronic architecture. The GSTN (Goods and Service Tax Network), a special purpose vehicle set up to cater to the backend of delivering GST, will provide a shared IT infrastructure and services to governments (Central and States) as well as taxpayers. For taxpayers, the GSTN portal will register taxpayers and facilitate them in filing returns and payments of returns. For governments, the portal will host the IT systems of all tax departments of the Centre and the States. Technically, this will reduce transaction costs of doing business, and cut transaction time. All an entrepreneur needs to do is upload invoice information, match input tax credit claims, upload returns, pay taxes and sign off with a digital signature. Placing every invoice online puts barriers to subjectivity by officials.
What if the transition is still too cumbersome for entrepreneurs not used to e-filings? Enter GST Suvidha Provider (GSP), intermediaries will help taxpayers with all aspects of the system, through apps connected to it. For instance, with tax functionality in place, GSPs can offer solutions to all three types of taxpayer — large corporations with completely automated systems, SMEs with semi-automated systems and small and tiny firms with no systems. After the initial hiccups, this digitisation of the tax system will offer the same ease to entrepreneurs in doing business as the email did for communication in the 1990s, the SMS to messaging in 2000s and e-wallets for transactions today. Since it is an institutionalised arrangement, errors can be tracked to the doors of these providers.
Another way the GST system could take India’s doing business rankings higher is in the simplicity and consolidation of taxes. At the central level, all excise duties, additional duties, additional duties of customs, special additional duty of customs, and service tax will collapse into a single tax, the GST. At the level of States, the state VAT, sales tax, luxury tax, entry tax, entertainment tax and other specific taxes on advertisements, purchases and lotteries will be replaced by the GST. In other words, fewer numbers of taxes, all of which capture old taxes into a single number, and the cess delivering a fiscal cushion until numbers get realised. Fewer taxes per product or service, within the confines of other variables — the calls for consolidating all taxes into a single number or two remain, but as explored earlier, the current system is not out of sync with
global trends — bring certainty of tax payments to the entrepreneur.
Among the constituents of ‘paying taxes’ in doing business are not only the number of taxes paid, which have fallen under the GST system, but also the hours per year spent on preparing tax returns. If the GSPs can reduce the time, it would support the ease of doing business, and ceteris paribus, take India’s rankings higher. While some individual sectors and industries may face friction during this transition, particularly if the GST rate is higher than the combined taxes rate, there is no doubt about the advantage of the GST in terms of convenience to doing business in the aggregate.
Further, India is shifting to the GST system from a position of several challenges. From cold evasion to hard compliances, the hurdles before India’s tax system are many. But for every hurdle crossed, the perceptual advantage in ease of doing business would rise. Besides, there are several low-hanging fruits in simply changing the stance of tax collectors from one where they view entrepreneurs as enemies against whom the state is at war to an entity that captures opportunities, offers jobs and creates wealth — and thereby enlarges the tax base. The first two quarters till December 2017 will be a period of putting compliance requirements in place. This would be a period of great dissonance, confusion, harassment, stress, from which recovery would take another quarter. Which means the tax part of Doing Business ranking in 2018 may see only a marginal change. Unless, of course, the might of the government fixes it in the first quarter itself.
Finance Minister chairing a GST Council meet in Srinagar | Source: Arun Jaitley/Twitter
During this period of tax uncertainty, the GST Council, that is expected to meet every two months, going forward until these wrinkles are ironed out needs to stay on high-alert. If the initial teething problems are resolved, entrepreneurs as well as tax officials begin to co-write the tax revenues on the same fiscal page, and the GST system becomes business as usual, these rankings should rise in 2019 and onwards; if not, they will fall. The failure would not only create cynicism among businesses, it might hurt jobs — arguably the weakest link in the Narendra Modi government today.
There is no doubt about Prime Minister Narendra Modi’s intent to raise India’s Doing Business rankings. “The Prime Minister asked all Chief Secretaries and all Secretaries of the Government of India to study the
report, and analyse the potential areas where there is scope for improvement in their respective departments and States,” a 26 October 2016 release from the Prime Minister’s Office stated, barely a day after the Doing Business report was released. “He asked for a report from all concerned in this regard, within a month, and asked the Cabinet Secretary to review the same thereafter.”
On the tax front, those implementing the GST — the GST Council, the GSTN, the GSPs, chartered accountants and most important, the tax bureaucracy — must follow his lead. Finally, the success or failure of the GST implementation, and through it the impact on doing business and making India an attractive investment destination, rests on them. That it is important is beyond doubt, and it will get done beyond debate. The only question that lingers is: by when? If the GST regime begins on 1 July as planned, and the bureaucracy supports rather than opposes entrepreneurs, the day of reckoning will be six quarters away, in October 2019.
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