In this SNL Financial article by Angie Kean, I discuss India’s proposed goods and services tax, the roadblocks facing its implementation, and why the expected impact on mining companies is likely to be minimal.

The GST is being presented as a major reform, but India’s deeper problems remain: corruption, weak administrative capacity, bureaucracy, and the centralization of power. Even when legislation passes, implementation in India is often far more difficult than the headlines suggest.

Originally published in SNL Financial on 9 August 2016.

Although a bill to introduce a goods and services tax has been passed by the upper house of India’s Parliament, there is still a strong chance the government will either be unable to implement the tax reform or it will take several years to roll out.

The GST, which will replace at least 17 levies, was unanimously approved in the first week of August and will now be put to a vote in the lower house.

There appears to be little doubt that the bill will be passed in full, with most states favoring the introduction of a national sales tax.

“Seemingly, everyone is in favor of this new tax regime, so it should get passed,” Anarcho Capital analyst Jayant Bhandari told SNL Metals & Mining. “However, a few of the states are opposing it, but if the majority of states support it, they have to accept it as well. I think it will get passed.”

One of the states opposing the move is Tamil Nadu, due to concerns that the introduction of GST will lead to significant revenue losses and undermine the state’s financial independence.

Although the tax details are still to be finalized, the GST rate could be as high as 18%.

However, India’s rising level of corruption poses a major problem for the government in the actual payment of taxes.

“I have never met an Indian bureaucrat who does not ask for a bribe,” Bhandari said. “So even if you impose this new regime, these guys will always create some kind of trouble to collect bribes.”

According to the analyst, if the tax rate is low, people in India often avoid paying bribes to avoid paying taxes, but a 18% rate is likely to increase corruption.

“If there is an 18% tax rate, all I have to do is pay a one-off bribe to avoid paying it,” Bhandari said. “Corruption in India is increasing, not going down right now.

“You have to pass through checkpoints if you go from one city to another, and these are bribe collection controls, and they will always keep those, irrespective of whatever tax regime it is.”

The largest barrier to introducing GST in India, however, is the government’s inability to implement the many changes required to roll out such a major legislative reform.

“The Indian government is incapable of undertaking big projects,” Bhandari said. “So this GST regime will require a massive amount of changes within the government, and there is a complete lack of intellectual capabilities to implement those kinds of changes.”

“I would be truly surprised if that actually ends up happening and if it can happen in two, three [or] four years.”

GST in India is expected to negatively impact small businesses, but the new tax will have minimal impact on the country’s mining sector, according to Bhandari.

“In my view … whatever happens, it won’t really have any impact on the mining companies,” he told SNL.

Small businesses, however, will be required to register for GST to obtain a refund, which means those who do not understand the process will need to pay accountants to do their paperwork.

“It will just create huge bureaucracy for small players,” Bhandari said.

“The last thing you want to do is to centralize anything, and GST centralizes indirect taxes.”