Government launches goods and services tax amid high fanfare but lack of clarity among small traders; experts warn prolonged disruption would hurt not just public but also the party; oppositionn unity goes for toss as NCP JD(U), JD(S) attend the function
CHENNAI / NEW DELHI: At the stroke of midnight on June 30, as the world slept, India — or at least the government— stayed awake to usher in a new tax regime. The country’s most ambitious economic reform since liberalisation — or maybe since Independence — is now a reality.
Launching the reform, Prime Minister Narendra Modi coined yet another of his famous phrases — Good and Simple Tax, and the term ‘Cooperative federalism’ was mentioned at least thrice in his 30-minute-long speech. “Just like Sardar Vallabhai Patel unified the country politically, GST will unify it economically,” he announced late on Friday night, adding that a wider tax base would help provide additional resources to poorer states like Uttar Pradesh, West Bengal, Odisha, Jharkhand and Bihar.
“The poor will benefit the most from GST, which is a work of Team India.
Detail updates of GST lauch event here: India's biggest tax reform Goods and Services Tax launched by President Pranab Mukherjee, PM Modi
It will also put an end to black money and corruption,” Modi said. President Pranab Mukherjee lauded the political consensus which allowed the long-pending reform to go through. “It is remarkable that 18 meetings have been held so far and all decisions were by consensus. GST is a tribute to the maturity and wisdom of India’s democracy.”
The saffron party is, however, wary that the new tax regime could end up being a double-edged sword — capable of injuring the ‘master’ if glitches sustain or pain persists. The other edge, they hope, will slay political opponents who risk being branded as obstacles to reforms.
The trick did work. Hours ahead of the launch, the so-called ‘Opposition unity’ was knocked out of the park by the Nationalist Congress by deciding to turn up for the midnight mela. JD(S) and JD(U) were also present for the launch ceremony.
The ruling party, however, was not hassled over attendance. “The larger the size of Opposition that boycotts, the grander the launch function would be,” a senior BJP functionary said ahead of the event. “The whole ownership of GST would then be with our party. Pain or gain, it will all be for the BJP.”
“Brand Modi will soar by several notches,” said another leader close to party chief. “We are taking calculated risks and deserve credit for pushing a reform that has been lying in the cold-storage for decades.”
Though it’s being lauded for several reasons, small traders and businessmen are apprehensive about the short-term ‘disruptions’ the government had warned about. Their dissatisfaction reflected in ‘mass strikes’ organised a day before the launch. For instance, the textile sector is facing a triple whammy — increased taxation, unpreparedness and lack of awareness.
Experts’ verdict is almost unanimous on the course of events — disruption in the short-term followed by normalisation, and tangible benefits in the long-term. The benefits include streamlined supply chains, no cascading taxation, an increased tax base and a unified market.
However, even large corporates are critical of dilution of the last outcome. “GST panel has failed to deliver our PM @narendramodi ‘s One Nation One Tax message. GST has been made into a multiple and complex tax regime,” said Kiran Mazumdar Shaw, CMD of Biocon, in a tweet.
The complexity of the final tax structure — with four bands — and a completely computerised filing system are the primary impediments to compliance by small business houses. “I’ve asked so many people about the new system, but I still do not understand how it works and how I have to file taxes,” pointed out G Selvaraghavan, a small scale tools manufacturer.
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“This is very important, because input tax credit will not be available for purchases made from non-compliant businesses,” pointed out Suresh Nandlal Rohira, partner, Grant Thornton. Input Tax Credit, a provision which allows businesses to deduct GST paid on input material purchases, is a vital pivot around which the new system will operate. Because the cost benefits from GST are set to accrue through Input Tax Credit, much of the disruption to the economy is expected to rise from this unpreparedness among MSMEs — many of whom do not have the IT infrastructure and skilled manpower to comply.
According to Confederation of All India Traders, nearly 60 percent of small businesses in the country are yet to adopt computerisation in their existing business format. “Therefore, though traders want to comply under GST, perhaps they may not be able to do so for want of technology,” it said.
The costs of being compliant is also set to eat into small businesses’ margins, especially ones which have managed to stay out of the tax net so far — which is no longer a choice, if annual turnover is over `20 lakh. Even the expected boost to GDP is being revised down. According to HSBC, GST will only add 0.40 per cent to GDP, because the multiple tax rates and exemptions announced under it are far from an ‘ideal’ structure. It also added that a big list of excluded items will result in incomplete input tax offsets, resulting in continued ‘tax cascading’ which an ideal GST (with minimal exemptions) would have eliminated.
Kumar Rajagopalan, CEO of the Retailers Association of India (RAI) put it differently. “Reactions to GST has three phases: Uninformed optimism, informed pessimism and finally informed optimism. The first phase existed till the mid-May 2017; and we are now in the second phase of informed pessimism that may peak by end August 2017. Informed optimism is a long way off and we hope will come soon.”
Well aware of troubles small traders could face, BJP has activated “machineries at its disposal” to minimise inconvenience. The point is being made abundantly clear — projecting this reform as India’s ‘second Independence’.