‘Plenty of hiccups’ expected with the arrival of biggest tax reform
The GST will rollout tonight and will subsume more than a dozen state and central levies into one tax
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 the country of 29 diverse states and 1.28 billion people into a single market for the first time.
“We are not ready,” said K.E. 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 across the country over tax rates and compliance burdens. In the states of 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 the agricultural state of Punjab.
The move should eventually expand India’s narrow tax base and increase government revenues. It has been heralded by economists and will count as the most important structural economic reform of Prime Minister Modi’s three-year-old 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 the GST is fully operational, it will be ground-breaking and significantly change India’s business environment.”
But even supporters think it’s going to be chaotic in the short-term, despite a twomonth relaxation in initial filing requirements.
Businesses are confused by a complicated structure, which includes four tax slabs ranging from 5 percent to 28 percent and numerous exemptions. It’s also not clear what sort of damage the nationwide roll out will inflict on the India’s fast-growing, $2 trillion economy before the long-term benefits kick in.
“There will be disruption,” said Rajeev Chandrasekhar, an investor and upper house lawmaker who is part of PM 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.