India tax reform faces roadblocks; minimal impact expected on miners

by Angie Kean  (originally published in the SNL Financial of 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 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 against the move is Tamil Nadu because of concerns the introduction of GST will lead to a significant loss of revenue and negatively impact the financial independence of the states.

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

However, India’s increasing level of corruption poses a big problem for the government with respect to the actual payment of the tax.

“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 will often not go to the trouble of paying a bribe to avoid paying the tax, but a rate of 18% 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 the introduction of GST in India, however, is the government’s inability to make the many changes needed to roll out such a big legislative reform.

“The Indian government is mostly 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 have a negative impact on small businesses in the country, but as for the country’s mining sector, the new tax will have a minimal impact, 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.”