Hiccups aside, hope on the horizon
TAX REFORM Attention on millions of small businesses that will file taxes for the first time
As India prepares to launch its biggest tax reform since independence in 1947, businesses and citizens across the country are bracing for economic chaos.
At midnight on July 1, Prime Minister Narendra Modi will formally usher in the country’s new goods and services tax. First proposed in 2006, the GST will subsume more than a dozen state and central levies into one tax, unifying this country of 29 diverse states and 1.28 billion people into a single market for the first time.
“We are not ready,” said KE Raghunathan, a Chennai-based business owner and president of the All India Manufacturers Association. “We do expect tremendous chaos.”
With the deadline looming, protests and industrial strikes broke out over tax rates and compliance burdens. In Tamil Nadu, Gujarat and Rajasthan, tens of thousands of textile workers went on strike, while the association that represents sellers of seeds, pesticides and fertilizers protested in Punjab.
The move should eventually expand India’s tax base and increase government revenues. It has been heralded by economists and will count as the most important structural economic reform of Modi’s administration.
The new tax will boost the country’s fiscal health in the medium-to-long term, wrote Eurasia Group analysts Shailesh Kumar and Sasha Riser-Kositsky in a June 28 note.
“The GST is considered the most important milestone for the Modi government,” they said. “It signals to investors the government’s ability to deliver on its reform agenda. Once GST is fully operational, it will be groundbreaking and significantly change India’s business environment.” But even supporters think it’s going to be chaotic in the short term, despite a two-month relaxation in initial filing requirements.
Businesses are confused by a complicated structure, which includes four tax slabs ranging from 5% to 28% and numerous exemptions. It’s also not clear what sort of damage the nationwide roll-out will inflict on the country’s fast-growing, $2 trillion economy before long-term benefits kick in. “There will be disruption,” said Rajeev Chandrasekhar, an investor and upper house lawmaker who is part of Modi’s ruling coalition and sat on a parliamentary committee on GST. “There will be plenty of hiccups — part technology, part administration.”
As India readies to implement the tax, attention has shifted from exhaustive legislative efforts to get India’s states and political parties on board to what happens next as millions of small businesses file taxes for the first time.
Part of the problem is that India is a “non-tax compliant” society, as the country’s finance minister has said frequently. Across India, fewer than 1% of people pay income tax and nearly 90% of workers are employed in the mostly non-taxed informal economy. For many small businesses, it’s not just that they — and their suppliers — will pay tax for the first time. It’s that the new tax is incredibly complex for businesses that may have operated only with dusty paper ledgers.
“Our chartered accountant says that we need to file three monthly sales reports for GST,” said Ashok Kumar Gupta, 37, who manages a pharmacy in New Delhi. “Along with this, we will file monthly, quarterly and annual returns.”
Many expect short-term disruption as parts of supply chains grapple with new requirements. “Given that literacy and digital knowledge varies, compliance with the registration and filing process is challenging,” Kumar and Riser-Kositsky wrote.