India: As easy as GST

The most important tax change in India’s history is rippling through the country’s commercial eco-system. The introduction of a Goods & Services Tax (GST) will almost certainly be positive for companies operating in India in the long term, but teething problems are inevitable.

July judder

India’s economy has grown strongly in recent years, but in July this came to a sudden through temporary halt. Manufacturing and services indexes slumped as industry digested the arrival on 1 July of GST, a sales tax that eliminates dozens of obscure state and local levies and removed the checkpoints on state borders that policed them.

This was despite some immediate early benefits from the new tax harmonisation. The most obvious, perhaps, was the removal of border checkpoints between Indian states. These were a valuable opportunity for officials to collect bribes under the auspices of tax inspections. Trucks hauling perishable goods were particularly vulnerable, as long delays in hot weather could destroy the value of the produce.

Of course, GST also opens new avenues for bribery. In early August a GST superintendent and his aide were arrested for allegedly taking bribes in return for not prosecuting tax evaders. Nor is the online system for filing GST returns easy to navigate. Indeed, for millions of Indian traders, particularly in the poorer east of the country, navigating online forms to file their monthly returns is likely to prove a gruelling task, given the lack of reliable power and internet connections.

This is not the only concern for smaller suppliers. Large India-wide enterprises often source their goods from smaller factories that lie within a state’s boundaries to avoid the delays and costs of moving goods across them. GST will allow supply chains to be consolidated at larger manufacturing and storage sites, forcing many smaller suppliers out of business.

Such smaller operators have already made their displeasure known. In July, textile traders in the state of Gujarat, one of India’s wealthiest launched a strike after their initial protests were met with baton-charges by police, closing markets in the textile hub of Surat. They were outraged at having been brought into the tax next by GST; evading taxes is a habit many Indian businesses have yet to break. Some apparel wholesalers reported that business was effectively frozen, because among their suppliers and retail vendors are individuals and companies who do not wish to register for GST.  Coupled with the efficiency gains that large companies can obtain by bypassing smaller suppliers, their prospects look bleak.

In the southern state of Tamil Nadu, meanwhile, cinema theatres launched an indefinite strike in protest against an increase in ticket prices caused by the new tax. Various sectors have been affected differently. Internally, it should be noted that GST does not apply to all products, however. Crucially, it does not apply to petrol, diesel and alcoholic drinks, meaning that duties on these vary between states, and raising the prospect of smuggling.

GST is having a positive effect on government finances. The first monthly filings for GST indicated a return for the government of INR420 billion (USD6.5 billion). Customs revenues almost doubled in July year on year as imports became liable for GST.

This will strengthen the ability of the state to promote development and offset social unrest, which should create a virtuous circle of improved governance and thus ever-improving tax returns. Arun Jaitley, the finance minister, says there is scope in future for rolling the middle two of the six GST rates (18 per cent and 12 per cent) into one to simplify the system. However, he indicated that to do so initially would have had too many adverse inflationary effects.

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