India is bracing for upheaval as it storms ahead with its most ambitious reform in decades — transforming the world’s fastest growing major economy into a single market for the first time.
The long-awaited goods and services tax (GST) rolls out Saturday even as businesses complain they are ill-prepared for the massive changes about to ripple through India’s unwieldy, $2 trillion economy.
The government promises the new regime will not just simplify trade by replacing more than a dozen levies with one tax, but combat corruption and enrichen state coffers by bringing the informal economy into the digital era.
Most economists agree the reform — first proposed in 2006 — is necessary and 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.
Industries are on strike, others are facing an avalanche of paperwork, while some retailers remain unclear about what to charge just days before the taxes take effect.
“There are different rates for a mobile set, charger and headphones — all of which come in one box,” said Praveen Khandelwal, secretary general of Confederation of All India Traders, pointing to one such example.
“What tax rate will be applicable in such a scenario? We don’t know yet.”
It took more than a decade to get the GST through parliament and political bickering over the particulars now means there are four tax rates instead of one as originally envisioned.
A slew of basic staples like fresh vegetables and milk are exempted, along with less obvious items like temple offerings, the national flag and human hair.
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.
Some industries have suddenly discovered their products elevated to a higher tax bracket.
Fireworks manufacturers are protesting over crackers being taxed at the maximum of 28 percent, while garment and textile workers are crying foul over heightened imposts.
Ayushi Gudwani, who runs online fashion startup Fable Street, supports the creation of a common market but was shocked to learn her taxes had more than doubled.
“Our profitability will be hit,” she told told AFP.
Costs are also mounting at India’s largest logistics firm Safexpress, which has hired 40 new staff to process a mountain of new paperwork.
Under the new regime, companies must file a tax return in every state they pass through — a nightmare for a trucking company shipping goods nationwide.
For Safexpress, that means instead of filing two annual tax returns they must submit 1,400, said managing director Rubal Jain.
“It’s going to be a lot of confusion and chaos and back and forth for the next three months, because no one knows what will happen,” he told AFP.
“It’ll be great in the long run, but transition will be a pain.”
All but the smallest businesses will now be required to declare their earnings online, an effort to broaden India’s woefully small tax base, digitise the economy and flush out cash hoarders.
But training employers to log tax information online presents immense challenges in India, where most small and informal businesses don’t own computers, let alone access the internet, the trade association said.
Safexpress cannot file its own returns until drivers upload their monthly invoices — a huge ask for truckers used to delivering goods, not paperwork, Jain said.
Gudwani meanwhile worries her suppliers — mostly tiny businesses — will struggle to get the hang of issuing receipts and wind up losing contracts.
India has one of the lowest tax-to-GDP ratios in the world and these changes, though initially painful, will have a “significant impact” on compliance, said Neelkanth Mishra, managing director at Credit Suisse.
“India is like a house under renovation. While the new parts are being built, no one will be happy,” he told AFP.
The sweeping reforms comes less than a year after Prime Minister Narendra Modi devalued India’s largest banknotes in a sudden move designed to outmanoeuvre tax cheats, but was blamed for a crippling cash shortage and slowing growth.
To avoid a similarly rough landing, the government has trained 60,000 tax bureaucrats and run sessions with private accountants to ensure everyone is up to speed on the finer points of the GST.
A GST Council has spent months thrashing out the final legislation, which was blocked in parliament for a year until an amended version was approved.
“This is a tax reform that was needed,” said Sunil Sinha, principal economist at Fitch India.
“We came into existence as a nation in 1947 but never had a common Indian market. GST will make India one.”
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