News / Economic Divide

India's new tax system: Will the poor benefit?

Sunday, 30 July 2017 5:08 AM [ Last Update: Sunday, 30 July 2017 5:09 AM ]

File photo shows a man walking by a banner for a GST service center

Described by the International Monetary Fund as the bright spot in the global landscape, India is one of the major economies with an average growth rate of approximately 7% over the last twenty years.

The second most populous country in the world topped the World Bank's growth outlook for the first time in fiscal year 2015–16, during which the economy grew 7.6 percent. And a Harvard university study has placed India on top of the list of the fastest growing economies over the next decade. Researchers at Harvard attribute India's rapid growth prospects to the fact that it is particularly well positioned to continue diversifying into new areas, given its capabilities.

The Indian government of Prime Minister Narendra Modi has adopted a number of measures to combat corruption in the South Asian country while simplifying trade rules. In November 2016, Modi devalued India's largest banknotes in a bid to crack down on tax evasion.

The move was also an effort to close down the booming economy of untaxed cash transactions, which paves the way for corruption and keeps counterfeit notes in circulation. The measure was controversial in India, where a huge parallel economy accounts for 20 percent of GDP and operates with near impunity. Withdrawing 500 and 1,000 rupee notes even sparked outrage among corrupt politicians who accepted cash bribes.

But there were more surprises in store for Indians. On July one, 2017, the government overhauled its existing tax regime replacing it with the Goods and Services Tax, the GST.

The measure brought India’s 1.25 billion-strong population into a single market for the first time, and amalgamated various state taxes into a single, all-encompassing tax. But what are the benefits of such a huge economic reform?

The GST which was first proposed in 2006 is the biggest tax reform in the 7 decades since India’s independence from Britain. Under the new system, goods and services will be taxed under four basic rates - 5%, 12% 18% and 28%. Respective to the percentages, these sectors will be affected.

The price of most goods and services are expected to rise in the immediate aftermath of the tax. Analysts expect economic growth to slow down over the next few months, but say it should pick up after the tax is fully implemented. The GST has drawn positive reaction from some business owners.

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