Businesses brace for biggest-ever tax reform

Big concern is Indian GST's sheer complexity

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 common market.

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 said, 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.

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% 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 — rates of 5%, 12%, 18% and 28%, 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%; sporting goods at 18%. 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 goods and services tax rollout rebuts complaints from bosses that the tax is too complex, adding that the IT back-end that will drive it — crunching up to five billion invoices a month — is robust.

“It is a technological marvel, as well as a fiscal marvel,” Revenue Secretary Hasmukh Adhia said.

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.