The GST of it

The two governments should sit down and work out a way to make transit services exempt from the GST

The Indian government has enforced the Goods and Services Tax (GST) with effect from July 1, 2017. This is a milestone in the economic history of India as it will bring about financial integration among all its states. The GST is built on the notion of ‘One Country One Tax’ regime and it has eliminated 17 different types of taxes, charges and fees and replaced them with a single tax structure classified under five categories. The GST slab thus ranges from zero percent upward to 5, 12, 18 and 28 percent. Goods and services, depending on their nature and type, fall under different slabs. This has also stirred the consumer market in India as the new tax regime has also changed the prices of goods and services there.

Nepal’s economy and supply systems are closely linked to India’s. The southern neighbor comprises two-thirds of our international trade, 42 percent of foreign direct investment, and it is a major source of tourists into Nepal. Nepal’s access to sea is practically confined to India as all of our transit traffic passes through the ports of Kolkata and Haldia, apart from the recently agreed port of Visakhapatnam. Nepal is also heavily dependent on India for essential goods like petroleum products, salt, cereals, fruits and vegetables. Similarly, the open border allows free movement of people, making it possible for them to cross the border, both ways, for pilgrimage, seasonal employment, vacationing and petty trade. Thus the policy shift in India could impact Nepali trade and economy.

Impact on trade

Let us consider the impact of newly-enforced GST on Nepal’s trade with India. In case of exports from Nepal, India would impose taxes on goods and services at par with their domestic products. The application of countervailing duties to offset the waiver of excise and domestic taxes of exporting countries is accepted practice in international trade. Previously there were state specific taxes and charges that were not uniform and harmonized. But with GST, all taxes are included in the new structure and there is no need to pay separate taxes or octroi to individual provinces of India. The transporter can save both time and money on account of smooth flow of traffic without having to stop at the border of each passing province.

While importing goods from India, as a general principle, the GST paid at the source would be refunded when goods cross the border into Nepal. It would be in India’s interest to increase exports and hence there should be no such tariffs in exports. However, the increased cost to manufacturing industries in India (due to increase in prices of raw materials and labor) may be passed on to Nepali importers too.

In talking about Nepal-India trade, one should not forget the great volume of unofficial trade that goes unrecorded. Every day thousands of people cross the border for petty trade and purchase of consumable items. Many families living in border areas are accustomed to such trade as they find the consumables and fast-moving consumer goods cheaper in India than in Nepali markets. Indian traders also visit Nepali farms and production units to purchase specific agricultural products like tea, ginger, honey, cardamom, and non-timber forest products and medicinal herbs that are in high demand in India.

In case of import of finished products and consumables into Nepal, the unofficial importer pays the GST which cannot be refunded by India due to informal nature of trade. Meanwhile, the importers of Nepali goods into India through unofficial channels do not have to pay the GST or any other taxes since this import is not captured in government records. Thus unofficial export to India would benefit more than unofficial import.

Impact on transit

The transit movement between the port of Kolkata/Haldia and Nepal border is hassle-filled, characterized by delays and inefficiency at the port, high transport cost, and opacity in operation of shipping lines and customs brokers. Transport cartels also hamper transit trade of Nepal. Application of services taxes and other charges during transport in India has gone up, by up to 15 percent than before the application of GST. Goods are exported to Nepal via Indian transport routes but this is in India treated as domestic movement and Nepali importers and exporters are thus bound to pay service tax. The argument of Indian authorities has been that Nepali importers should pay since payment is in Indian currency and invoices are drawn by Indian companies.

Before the introduction of GST, Nepali importers and exporters were bound to pay 15 percent service charge on all operations of Kolkata Port and surcharge in the form of cost insurance and freight (CIF) between the seaport and Nepal border. But with the application of GST the charges at Kolkata, particularly for terminal handling, delays and detention, and other invoices raised on Nepal-bound cargo will now attract 18 percent GST, which will be 3 percentage points higher than pre-GST charges. However, the charges on transport by road and rail will be limited to 5 percent instead of 15 percent, thereby creating a saving of 10 percentage points.

Traffic in transit services does not fall under domestic domain. Previously, service charges have been levied by India on the ground that the services are billed in India. So the two governments should sit down and work out a way to make transit services exempt from GST, which of course is domestic tax of India. This might also be achieved through modifications in the bilateral treaty of transit.

Wait and watch

Nepali traders complain that India does not treat export to Nepal as real export since payment of trade is made in Indian currency instead of US dollar. These anomalies were addressed during the transit treaty’s revision in 2009 yet implementation remains weak.

The implication of GST on Nepal will get clearer over time. Hence it is important for Nepal to wait and see, say, for a couple of months, as to how it impacts Nepali economy.

However, in this time, the government of Nepal should carry out a detailed study of the possible impact of GST in India on various sectors of the Nepali economy. There will have to be widespread consultations to mitigate the GST’s adverse impacts on trade, transit and investment. The ultimate goal should be to put in place a mutually advantageous trade regime as well as an efficient transit system.

The author is a former secretary of government of Nepal