In its bi-annual India Development Update Report, the World Bank said that the Indian Goods and Service Tax (GST) system is one of the most complex compared to other countries and also has the second highest tax rate in the world.
Highest standard rate in Asia
"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," said World Bank.
It also added that India has the highest standard rate in Asia.
Most number of tax rates in the world
India's GST has 5 tax slabs; 0, 5%, 12%, 18% and 28%. Further gold is separately taxed at 3% while alcohol, petroleum products, real estate stamp duties, and electricity are excluded from GST.
The report stated that most countries around the world 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.
High compliance costs
The report also spoke about the increase in compliance costs of tax paying firms. "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.
Will benefit in the long run
The World Bank however said that the adjustment process can affect economic activity for multiple months but the benefits of GST will outweigh its costs in the long run.
"Key to success is a policy design that minimizes compliance burden, for example by minimizing 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 programs and risk-based audit programs," said the report.