Ready or not, brace up for biggest tax ‘reform’

Businessman Pankaj Jain is so worried about the impending launch of the Goods and Services Tax that he is thinking of shutting down his tiny textile factory in Meerut 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 from New Delhi, are two calculators. Turning to open a metal cabinet, he pulls out a handwritten ledger to show how he keeps his books.

“We will have to hire an accountant and get a computer,” the 52-year-old said, as a dozen ancient power looms clattered away in the ramshackle workshop next door.

The Narendra Modi led government at the Centre says by replacing several federal and state taxes, GST will make life simpler for business. 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 per cent 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,” says 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 GST’s sheer complexity — with rates of 5, 12, 18 and 28 per cent, and myriad exceptions. The official schedule of GST rates runs to 213 pages and has undergone repeated last-minute changes.

“Rubber goods are taxed at 12 per cent; sporting goods at 18 per cent. I make rubber sporting goods — so what tax am I supposed to pay?” asks Anurag Agarwal, the local IIA secretary.

The top government official responsible for coordinating the GST rollout rebuts complaints from bosses that the tax is too complex, adding that the IT backend 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 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.

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 per cent of manufacturing and employ more than 11.7 crore 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 per cent of the cash in circulation. “It could throw the business out of gear — it can affect your volumes by at least 30 per cent,” said the head of one large cement company in the Delhi region.

Back in Meerut, Pankaj Jain worries that hiring an accountant and charging 5 per cent GST on his bedsheets could eat up to two-thirds of his annual profits of Rs 4 lakh to Rs 5 lakh. “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.” — Reuters