Ready or not, Indian
businesses brace for biggest-ever tax reform
Send a link to a friend
[June 28, 2017]
By Douglas Busvine and Manoj Kumar
MEERUT, India (Reuters) - Businessman
Pankaj Jain is so worried about the impending launch of a new sales tax
in India that he is thinking of shutting down his tiny textile factory
for a month to give himself time to adjust.
Jain is one of 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
But he is simply not ready for a regime that from July 1 will for the
first time tax the bed linen his 10 workers make, and require him to
file his taxes every month online.
On the desk in his tiny office in Meerut, two hours drive northeast of
New Delhi, lay two calculators. Turning to open a metal cabinet, he
pulled out a hand-written ledger to show how he keeps his books.
"We will have to hire an accountant - and get a computer," the thickset
52-year-old told Reuters, as a dozen ancient power looms clattered away
in the ramshackle workshop next door.
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.
To drive home the point, Bollywood superstar Amitabh Bachchan has
appeared in a promotional video in which he weaves a cat's cradle
between the fingers of his hands - symbolizing India's thicket of old
With a flourish, the tangle is gone and Bachchan proclaims: "One nation,
one tax, one market!" (http://bit.ly/2sch8ou)
NOT SO SIMPLE
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.
[to top of second column]
Furniture traders shout slogans during a protest demanding to reduce
Goods and Services Tax (GST) rates, in New Delhi, India June 28,
2017. REUTERS/Adnan Abidi
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
Back in Meerut, Pankaj Jain worries that hiring an accountant and charging 5
percent GST on his bedsheets could eat up to two-thirds of his annual profits of
400,000-500,000 rupees ($6,210-$7,760).
"I know my costs will go up, but I don't know about my income," he said. "I
might even have to shut up shop completely and go into trading."
($1 = 64.4300 Indian rupees)
(Additional reporting by Rupam Jain; Writing by Douglas Busvine; Editing by Alex
[© 2017 Thomson Reuters. All rights
Copyright 2017 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.