Doubts and anger as India launches biggest-ever tax reform

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Rakesh Sachdeva sells vehicle parts in a busy market in central Delhi, just a few kilometres from the India prime minister’s office. Yet despite having a flourishing business he does not pay any tax.

Until now, his rundown premises and small-scale operation have kept the business below the radar of India’s tax officials. Now, however, “the party will be over”, said Mr Sachdeva, 51.

A nationwide goods and services tax (GST), coming into effect on Saturday, has faced criticism for its complex design. But the country’s biggest tax reform since independence promises to bring millions of firms like Mr Sachdeva’s into the tax net, boosting government revenues and India’s sovereign credit profile.

The new tax will require firms to upload their invoices every month to a portal that will match them with those of their suppliers or vendors.

Because a tax number is needed for a firm to claim a credit on the cost of its inputs, many companies are refusing to buy from unregistered businesses. Those who do not sign up risk losing any customer who has.

“I have no option, but to register with the new system,” said Mr Sachdeva, who asked that the name and precise location of his shop were not revealed.

Improved tax compliance should shore up public finances, increasing resources for welfare and development spending and giving a lift to the US$2 trillion economy.

India’s tax-to-GDP ratio of 16.6 per cent is one of the worst among major economies — less the half the 34 per cent average for the members of the OECD and also below many emerging economies.

While there is no official estimate of the potential fiscal gain, some tax experts say the GST, after the initial teething trouble, would lift the tax-to-GDP ratio by as much as 4 percentage points as the number of tax filers is estimated to more than treble to 30 million.

The government promises the new regime will simplify trade by replacing more than a dozen levies with one tax, combat corruption, and enrich state coffers by bringing the informal economy into the digital era.

Most economists agree the reform — first proposed in 2006 — is long overdue, but warn the initial shock to the economy is likely to drag, rather than stoke, growth in the short term as businesses adjust.

There are already signs the transition could be rocky.

Some industries are on strike, others fear an avalanche of paperwork, while some retailers remain unclear about what to charge.

Textile workers have been staging protests in New Delhi and other cities in the run-up to the launch.

On Friday the Bhartiya Udyog Vyapar Mandal, a national traders’ association that claims 60 million members, called for a day-long strike to protest against the GST.

“Since August last year we have put forward our demands on GST but the government has never responded,” said Vijay Prakash Jain, the association’s national secretary general. “We told the government, either fix this, or we will strike.”

Some of its demands include a rollback of taxes on textiles and packaged grains, and a switch to quarterly filing of tax returns instead of the monthly record mandated under the GST.

Opposition parties said they would to boycott the launch of the GST by prime minister Narendra Modi at a special sitting of both houses of parliament at midnight on Friday.

The Congress party dismissed the launch event as a “publicity gimmick”, while the Rashtriya Janata Dal (RJD) said it would “boycott this mega spectacle of optical illusion”.

“Though we have been in favour of GST, we believe there are pressing concerns, particularly among the small and medium level traders and manufacturing units, which remain unaddressed,” said RJD spokesman Manoj Kumar Jha.

Bickering in parliament over the GST now means there are four tax rates — 5, 12, 18 and 28 per cent — instead of one as originally envisioned.

So-called “sin” goods like tobacco will be slapped with extra levies, while states will still be allowed to separately tax some products including alcohol, petrol and aviation fuel.

The change in the tax system triggered a shopping spree among consumers uncertain of how the cost of goods will be affected by the GST. This is because prices vary by brand and taxes varied from state to state under the old system. Refrigerators and air conditioners are among items likely to cost much more — taxed at the top rate of 28 per cent whereas the highest tax applied in any of India’s 29 states was 23 per cent.

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