India to Rollout Momentous Tax Reform, But Many Fear Rocky Transition

India is set to rollout a momentous tax reform at midnight Friday that will transform the country of 1.3 billion people into a single market.

The Goods and Services Tax (GST) will replace an entanglement of more than a dozen confusing levies with a single tax and bring down barriers between states.

But the transition is bringing upheaval. The new tax has sparked strikes, protests and concerns it could disrupt many businesses unprepared for a leap into the digital economy.

In markets across the country, confusion and chaos prevail among millions of small shopkeepers and traders, who have for decades maintained records in dusty ledgers and issued paper receipts to customers. Some are hurriedly investing in computers as new rules require all but the smallest businesses to submit online taxes every month.

Calculator to computer

Suresh Kumar, who runs a family owned store in a bustling neighborhood market in New Delhi, has never operated a computer and does not have an Internet connection in his shop. His customers mostly pay in cash and a calculator on his counter is the only modern gadget he has used since he opened this shop 47 years ago.

“How will I pay the salary of an accountant? I can barely cover the costs of these three men who help me,” Kumar said, pointing out that stores like his run on wafer-thin profit margins to stay in business.

The archaic accounting systems that were the method of operation of thousands of shops and traders also kept them out of the formal economy.

But as GST draws them into the tax net, government revenues are expected to get a huge boost in a country where tax compliance has been very low.

​Growing pains

The government agrees there will be growing pains due to the scale of the task ahead but points to long-term advantages. Over time, the new tax is expected to add about 2 percent to gross domestic output and vastly improve business efficiencies in the world’s fastest growing economy.

Economists say the GST will be a benefit for manufacturers, because it will free up domestic trade by cutting through a gigantic bureaucracy that involved a myriad of tax inspectors and checkpoints at state borders.

At the moment, trucks transporting goods lose an estimated 60 percent of transit time as they wait at state borders. Paying bribes was a fact of life accepted by businesses.

The tax will also make India’s $2 trillion economy more attractive to investors as it makes the economy more transparent.

More time needed

But in recent weeks many businesses have called for a postponement of the July 1 rollout, saying they did not get enough time to prepare.

K.E. Raghunathan, president of the All India Manufacturers Organization, said businesses need more time to adjust.

“The way it is being implemented, it is bound to create lots of chaotic conditions,” he said.

Underlining concerns of millions of small and medium manufacturers, he said, “they neither have the wherewithal to understand the sudden implementation and if they approach chartered accountants or consultants, it costs lots of money.”

A big concern is that the GST being rolled out by India is far more complex than that introduced by other countries where a single rate prevails. There will be four layers of taxation with rates of 5, 12, 18 and 28 percent.

Manufacturers and traders complain the different levels are creating confusion.

More than 50,000 textile traders went on strike this week. Thousands of other traders shut businesses Friday.

Many big and small retailers worried about the switchover have been offering massive discount sales across the country to get rid of their inventories.

Government pushes ahead

But the government has brushed aside concerns about businesses not being prepared for the switchover. 

“If he is still not ready, then I am afraid he does not want to be ready,” said Finance Minister Arun Jaitley recently as he rejected calls for a delay of the rollout.

Businesses say the tax rollout is the second disruption they have faced, coming months after Prime Minister Narendra Modi’s radical move to scrap 86 percent of the country’s currency, which slowed the economy.

As customers pour into his shop to buy stationery and other items, New Delhi shopkeeper Vimal Jain wonders whether he will handle customers or enter transactions in a computer starting Saturday. 

“Now this is another headache,” he said. “We had barely begun to recover from demonetization and now this sword hangs over our head.”

The tax will be ushered in at a grand midnight ceremony in parliament, but even that has become contentious. Calling it a “publicity stunt,” the main opposition Congress Party and several other parties have said they will boycott the special session.
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