Good, bad and ugly of India new national sales tax journey
If there’s one word that sums up the response of India’s businesses and
consumers to the country’s new national sales tax, it’s 'confused.'
Will premium economy
seats be taxed as economy class or business? Is a chocolate-coated
biscuit a biscuit or chocolate? These are the questions now troubling
businesses large and small across India’s $2.3 trillion economy.
The roll out of the goods and services tax came less than a year after
the government’s shock withdrawal of 86 percent of the nation’s
currency, which helped knock India’s GDP growth down to 6.1 percent from 7.1 percent in the January-March quarter and eliminated as many as 1.5 million jobs.
After more than a decade-long journey, the biggest tax reform since
independence in 1947 became a reality on July 1, combining more than a
dozen levies into one tax.
Many Indians responded by sharing their first GST bill on WhatsApp, Facebook and Twitter. The novelty soon wore off. Small traders
and businesses struggled to issue invoices and battled with the new
software, with some forced to provide handwritten invoices to customers.
In an attempt to cut through the confusion, the government
held tax ‘master classes’ and published advertisements in the
newspapers showing the revised prices alongside the old prices of goods.
dozen states of 29 have abolished check points at their borders, where
tax compliance and goods inspections used to delay deliveries -- often
Yet while travel time has been reduced as tax
inspectors disappear from the roads, transport department officials are
still actively checking vehicles. Transportation of illegal goods has
reduced because those businesses cannot provide GST-compliant bills.
“People are finding it tough to understand the GST,"
said Pradeep Singal, national president of the All India Transporters
Welfare Association. "This has meant that companies had ordered in
advance and are still using old stocks,” pushing down transport business
by 30 percent."
Traders, particularly in small towns, are struggling with their lack of
knowledge of the new tax regime -- compliance obligations, raising
invoices and accessing input credits, said Praveen Khandelwal, secretary
general of the Confederation of All India Traders.
merchants and e-commerce companies are tripping over a dizzying array of
documents and the complicated classification system that determines
what percentage of tax will be charged. Thousands of small merchants
have stopped selling on e-commerce sites because they can’t meet these
Add to that, there’s multiple rates for
various products. Footwear below 500 rupees ($7.70) attracts one rate
and above that price attracts a higher tax rate, leaving suppliers
confused over which rate they should apply.
“Any new law
would have interpretation issues," said Pratik Jain, national leader
indirect tax at PWC India. "Like what rates would be charged for an
economy-plus ticket issued by some airlines? It should be charged at
Whether the GST network can seamlessly match billions of credits,
facilitate tax collections, provide refunds and check evasions will be
tested when most of the traders and companies file returns in September.
Businesses have not yet uploaded their sales and purchases
invoices generated post-July 1 on the network, as that part of the
system has not been functioning and companies have been allowed to file
late returns for first two months.
“The biggest problem
being faced right now is that the GSTN has still not formalized their
format for firms to pay taxes,” said Sachin Menon, national head of
indirect tax at KPMG India. “We have some multiple revisions in format
in the last couple of weeks alone. Companies providing GST software are having a tough time.”
Small business owners, as well as traders and shopkeepers who have
never turned on a computer, are scrambling to acquire the skills to
navigate these technological challenges.
No Single Market
Prices of some products are varying according to location as traders
have not fully implemented the new structure and profiteers have stepped
in, hindering the creation of a single Indian market.
instance, Maruti Suzuki India Ltd.’s Baleno Sigma gasoline model cost
635,000 rupees near Navi Mumbai in Maharashtra while the same model is
priced at 664,952 in Bengaluru in Karnataka.
comparison of price of motorcycles and cars across the country reveals a
convergence in price post-GST,” equity analysts of Jefferies India
Private Ltd., the unit of the global investment banking firm said in a
July 13 note.
Movie tickets in Tamil Nadu and Maharashtra
became costlier as the states imposed additional taxes, defeating the
purpose of a unified tax. The federal government, however, has set up a
panel of officials to monitor any price rise, shortage of commodities
and implementation of GST.
Textile traders have been protesting to demand that fabrics be
exempted from the tax. The government is reluctant to agree, saying it
will break down the input tax credit chain.
won’t be able to sustain the rise in costs, given that 60 percent of the
trade is in the informal sector, said S. Sunanda, secretary general of
the Confederation of Indian Textile Industry, which represents more than
"Individuals form about 65 percent of units
involved in our trade," Sunanda said. "The trade will be hit by cheaper
imports from China, Bangladesh and Indonesia."
There’s a 5 percent GST on cotton, however the government raised tax rates on man-made fiber to 18 percent from 12 percent.
"While the medium-to-long run benefits of GST cannot be disputed, the
short-run impact on growth is expected to be negative as compliance,
confusion and inventory effects take a toll," said Abhishek Gupta, India
economist at Bloomberg Intelligence. "However, recorded GDP growth is
still likely to show an increase as part of the shadow economy shifts to
the formal sector."