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Ready or not, India moves for biggest-ever tax reform


Some businessmen in India are so worried about the impending launch of a new sales tax in India that they are thinking of shutting down their business for a month to give themself time to adjust.
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Millions of small business owners who face wrenching change from India's biggest tax reform since independence that will unify the country's $2 trillion economy and 1.3 billion people into a common market.

But are simply not ready for a regime that from July 1 will for the first time tax their products and require them to file his taxes every month online.

Many of the small business men would be required to hire accountants and have computers.

Prime Minister Narendra Modi's government says that by replacing several federal and state taxes, the new Goods and Services Tax (GST) will make life simpler for business.

By tearing down barriers between India's 29 states, the GST should deliver efficiency gains to larger businesses. HSBC estimates the reform could add 0.4 percent to economic growth.

Yet at the local chapter of the Indian Industries Association, which groups 6,500 smaller enterprises nationwide, the talk is about how to cope in the aftermath of the GST rollout.

"In the initial months, there may be utter confusion," said chairman Ashok Malhotra, who runs one firm that manufactures voltage stabilisers and a second that makes timing equipment for boxing contests.

A big concern is the Indian GST's sheer complexity - with rates of 5, 12, 18 and 28 percent, and myriad exceptions, it contrasts with simpler, flatter and broader sales taxes in other countries.

The official schedule of GST rates runs to 213 pages and has undergone repeated last-minute changes.

"Rubber goods are taxed at 12 percent; sporting goods at 18 percent. I make rubber sporting goods – so what tax am I supposed to pay?" asks Anurag Agarwal, the local IIA secretary.

GRACE PERIOD?

The top government official responsible for coordinating the GST rollout rebuts complaints from bosses that the tax is too complex, adding that the IT back-end that will drive it - crunching up to 5 billion invoices a month - is robust.

"It is a technological marvel, as well as a fiscal marvel," Revenue Secretary Hasmukh Adhia told Reuters in an interview.

The government will, however, allow firms to file simplified returns for July and August. From September they must file a total of 37 online returns annually - three each month and one at the year's end - for each state they operate in.

One particular concern is how a new feature of the GST, the input tax credit, will work. This allows a company to claim refunds on its inputs and means it should only pay tax on the value it adds.

The structure will encourage companies to buy from suppliers that are GST-compliant, so that tax credits can flow down a supply chain.

That spells bad news for small firms hesitating to shift into the formal economy. The government estimates smaller companies account for 45 percent of manufacturing and employ more than 117 million people.

Adhia played down the risk of job losses, however, saying this would be offset by new service sector jobs.

The prospect of disruption is drawing comparisons with Modi's decision last November to scrap high-value bank notes that made up 86 percent of the cash in circulation, in a bid to purge illicit "black money" from the system.

The note ban caused severe disruption to India's cash-driven economy and slammed the brakes on growth, which slowed to a two-year low in the quarter to March.

"It could throw the business out of gear - it can affect your volumes by at least 30 percent," said the head of one large cement company in the Delhi region.


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Item Reviewed: Ready or not, India moves for biggest-ever tax reform Rating: 5 Reviewed By: PRASHANT ENTERPRISES