Saturday, July 1

India's historic tax reform: the reformers have their work cut out for them

India launches new single nationwide tax amid confusion
By ASHOK SHARMA in New Delhi
 Jul 1, 2017, 5:45 AM ET

Shops and businesses reopened in India amid confusion Saturday, hours after the government introduced a new nationwide tax that will change the cost of nearly everything people buy, replacing a complicated mix of state and federal taxes.

Prime Minister Narendra Modi heralded the major overhaul of the taxation system — known as the Goods and Services Tax — at a midnight ceremony Friday in Parliament.

The main opposition Congress party and some other parties boycotted the ceremony, arguing that nearly 7 million traders needed more time to prepare for the new system, which requires them to file tax returns every month. The opposition, however, supported the new tax system.

"There is confusion right now," said Manish Arora, a New Delhi pharmacy owner who was selling medicine to customers at the old prices. "My suppliers say they will be able to provide the pricing of medicines under the new system later Saturday."

Balbir Singh, who manufactures television sets, said his clients in small towns and villages didn't know much about the new system. "I expect my business to go down by 60-70 percent in the next two to three months before it picks up again," he said.

Traders shut shops and businesses as a protest in the Indian portion of Kashmir, where insurgent groups have been fighting for independence from India or the region's merger with neighboring Pakistan since 1989.

"This law aims at crushing the economic activities of Kashmir," said Mohammed Yasin Khan, a trade union leader. "We will not allow implementation of the GST in the region. Kashmir is otherwise declared a disturbed area. So, legally and logically there can't be implementation of the new system."

Modi said in his speech Friday that the new system would eliminate 500 types of taxes in favor of one tax across the country, a catalyst that would remove trade imbalance and promote exports.

"GST is a simple, transparent system that prevents generation of black money and curbs corruption," the prime minister said. "The system gives opportunity to honesty and people who do honest business."

Mitesh Prajapati, a director for Steel India Private. Ltd., said that he supported the government initiative, but that small business owners have been intimidated by the technological requirements for implementing the new system.

India's chief economic adviser, Arvind Subramanian, was confident that the teething problems would be worked out soon. "There will be some hurdles initially, but we will be able to remove them in one or two months," he told reporters.

The government published lists last month showing that almost every item for sale in India, from shampoo to tea to automobiles, should be taxed within four broad categories — at rates of 5 percent, 12 percent, 18 percent or 28 percent. It had already ordered all businesses in January to adopt or upgrade cash registers and computer systems so they are able to file tax returns that comply with the new tax regime.

Most of India's 29 states have passed local laws to implement the new tax regime, but some have pleaded for more time. The government dismissed that idea, but at least one industry group — the Associated Chambers of Commerce and Industry of India — urged a delay, saying the government's own computer networks were not yet ready for the change.

First proposed in 2003, the idea was bogged down for years in bipartisan debate, with various governments trying to push it forward while opposition politicians dragged it back. Before Modi and his Bharatya Janata Party [BJP] came to power three years ago, they were staunchly against the move.

Some opposition parties asked the government to delay implementation of the new system until October because Indian businesses were still recovering from the government's snap decision to remove 86 percent of its currency from circulation overnight on Nov. 8. In the months that followed, India replaced the old currency notes with newly designed bills. But the move caused chaos within the country's cash-dependent economy, hurting industries like construction and tourism, and hitting poor people the hardest.

On Friday, at a crowded New Delhi market plastered with posters announcing massive sales, shoppers were vacuuming up household gadgets and high-end electronics in the last hours before the new sales tax took effect.

Nafees Ahmad scoured the stores for a new air conditioner and LED television set with his wife and teenage son in tow.

"Our TV is fine. We did want to buy a new one, just not this soon," he said with a smile as he checked prices at the Electronics Paradise store. "But when the GST is applied everything will cost more, so we decided to just go ahead and buy it now."

While economists mostly agree that a single, nationwide tax will streamline business, there are concerns about how an economy as unwieldy as India's will transition to a system that involves filing monthly tax returns online.

It was hard for Indian shoppers to know what the cost of almost anything will become because prices vary by brand and the current taxes varied from state to state. Refrigerators and air conditioners were among items likely to cost much more; they'll be taxed at the top rate of 28 percent while the highest tax applied in any of India's states now is 23 percent.

"Though experts agree on the long-term benefits, including the ease of doing business in India and bringing swathes of the country's informal economy inside the tax net, they say in the near term there could be significant disruptions."

My take: If the BJP gets too ambitious too fast with bringing in tax reforms, the Congress Party will be waiting.

ndia rolls out its biggest tax reform in 70 years. Here’s what it means
Friday, 30 Jun 2017 | 4:24 AM ET
  • Experts agree that India's historic GST rollout will have long-term benefits.
  • HSBC estimates in the long run, the new tax reforms could add about 40 basis-points to India's economic growth.
  • But there are short-term implementation challenges, including ensuring small-and-medium businesses are tax-compliant, the experts said.
One of India's most ambitious economic reform plans in 70 years will ultimately boost tax receipts and provide simplicity for businesses, but the true impact may not be felt for at least a decade due to implementation challenges, experts said.

After several rounds of deadlock in the parliament, India rolled out the Goods and Services Tax (GST) on July 1, replacing a thicket of indirect central and state levies that critics argue have blunted economic competitiveness and hobbled efforts to lift more out of poverty.

Observers have described the reform as the most meaningful change to India's tax regime since the country became independent in 1947.

The government will introduce GST for a variety of goods and services along four main rate bands: 5-, 12-, 18- and 28 percent irrespective of the location of purchase. Certain goods such as fresh meat, eggs, milk, among others, will not be taxed, according to a list compiled by the Economic Times newspaper.

Vishnu Varathan, a senior economist at Mizuho Bank, told CNBC's "The Rundown" that the full economic potential of this historical tax reform could take years to materialize as India would first need to build up its tax ecosystem.

"Long term, and we're talking more than five years, we're talking about eight to 10 years, I think it will lift growth potential, that's for sure," he said.

In the near term, the reform will formalize more of India's untaxed economy, which would increase efficiency but not the size of the gross domestic product (GDP), he added.

HSBC in a report in May also predicted the GST rollout will add about 40 basis-points to India's GDP growth in the medium term, lower than their initial forecast of 80 basis points. Pranjul Bhandari, chief India economist at HSBC, explained that in HSBC's previous estimate, the growth fillip was meant to come from "having the same tax rate for each product across all states and having the same tax rate across all goods and services."

"Given that the second source of efficiency gains is getting compromised in the multiple rate structure, the growth impact could halve, to the 40bps ballpark," Bhandari said in the note.

Though experts agree on the long-term benefits, including the ease of doing business in India and bringing swathes of the country's informal economy inside the tax net, they say in the near term there could be significant disruptions.

Girija Pande, executive chairman at Apex Avalon Consulting, told CNBC's "Squawk Box" that it will be a challenge to implement the GST among small and medium businesses.

"Many of them were not even reporting their sales and revenue figures. I think some of them will be coming back into the tax net," said Pande. "I think the challenge (of implementation) is that we have delayed the outreach. The training and the outreach should have been done for a scale of this project."

Much of the tax processing and refund claims under GST will be done electronically, underpinning Prime Minister Narendra Modi's bid to digitize India. Businesses will have to align their existing software systems with the online tax portal that was rolled out by the GST Network — the company that has been set up to provide IT infrastructure and services for the GST roll-out — to process tax filings and input credit claims.

While critics have doubted the ability of the technical infrastructure to handle large volumes of traffic, local media reported the GST Network said over 6.6 million taxpayers had already enrolled onto the platform.

"The question is, many of these entities will have to get used to running an automated system, which they are probably not used to," said Pande. "There is a training element here."

Software providers such as SAP have undertaken initiatives to reach out to the scores of small-and-medium enterprises to familiarize them with the technical aspects of the GST rollout. SAP is also providing software to help companies become tax compliant and better manage their businesses.

SAP India's president and managing director, Deb Deep Sengupta, told CNBC in a phone interview that "technology will be least of the problems" in the GST rollout and implementation.

"I think it's a matter of creating the awareness on a continuous basis, working both with the policy makers as well as with the industry associations and the end consumers is something which is going to be, I would say, the biggest challenge and the opportunity," Sengupta said.

Both Sengupta and Pande implied that the biggest hurdle will be to change the mindset and business practices for many of the smaller organizations.

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