India now sees itself living through what is being touted as the most historic and most impactful tax reform measure passed in the country’s 70 years of independence. The Goods and Services Tax (GST) was rolled out through a midnight session of Parliament, with both Houses in attendance. This new tax is designed to simplify India’s existing multitude of taxes and levies and eliminate individual states’ value added taxes. GST is set up to tax goods and services under one of four slabs: 5%, 12%, 18%, or 28%. The slabs are designed with some flexibility on either end, which means that some necessities like foods and medicines are exempt or taxed at the lower rates, while luxury or durable goods like refrigerators and automobiles can be taxed at 28% or higher in some cases.
The new tax carries many proposed benefits, among which are increased economic activity and less-frequent tax changes, but the changes required by GST’s promised simplicity and transparency may cause headaches for some within India’s diverse small business community. With such a momentous change, some feel that the tax was designed without the consent or consultation of the business owners themselves, and argue that the tax was not created with common sense and real world implementation in mind. With some 60 million business owners bracing themselves for what could be a jarring transition, there are many questions about the impact and reach of GST.
All transactions between businesses and consumers must now be submitted electronically and businesses are required to file tax returns online at least once a month. Many small businesses maintain records in manual ledgers and have never relied on a computer to store transmit data. With 2% or fewer of business owners possessing computers and an internet connection, this could mean a massive shift in the need for technology and education on how to use it. GST was written in a way that allows an exemption to this rule for businesses with annual revenues of less than two million rupees ($31,000), but the market may force the smaller groups into compliance, as larger businesses will demand electronic records from their smaller suppliers and service providers.
There are also concerns around the costs and taxation of retailers’ existing inventories. Having goods on hand that were obtained and taxed under a variety of old rates and needing now to sell them at a consistent rate may mean taking losses on some items at the point of sale. This has caused many businesses to pause operations temporarily to liquidate old stock before repurchasing goods at the new rate. Some businesses report a 90% or worse decline in monthly revenues over this period while they adjust to the new system. Shops like supermarkets and those selling a variety of goods have been forced to take the time to carefully adjust prices on items that fall into multiple tax slabs. These concerns will likely mean that there will be disputes over which categories items fall into, as the slabs were designed very broadly to capture all goods and services.
With the tax being passed and implemented so quickly, many smaller business owners find themselves at the mercy of the larger entities they may be supplying. A proposed benefit of GST is that businesses can receive a tax credit for the input of goods used, but the requirement to receive this credit is that all suppliers and businesses that provided those inputs have also paid their part of the taxes along the way. This puts pressure on the smaller businesses in the supply chain to comply immediately or face the prospect of losing what could be a very large portion of their revenues. This sort of “trickle down policing” has already caused many online shopping portals to remove suppliers that aren’t ready for the transition.
All is not bad news, however, as the change will likely result in a greatly simplified overall tax process with one tax to account for. This also means that the previous system of frequent rate changes and random increases in taxes is replaced by a centrally controlled tax with percentages that are widely known and very transparent. This should greatly lower the barriers to entry for startups and small businesses, because the previously impossible to navigate system is gone. Even with the potential for massive technological headaches and the time that it will take to move the entirety of the small business population to an automated system, the new system of accounting will result in less bureaucracy and fewer hands touching the taxes.
Despite the chaotic and perhaps incomplete rollout of GST, the change represents a major step forward toward a modern and globally competitive economy. Over time, the growing pains brought on by changes in technology and new requirements for total compliance will likely wane and some of the economic benefits will begin to be seen. Also it will contribute at least 1% increase in growth rates for the India economy on a yearly basis.
Disclaimer: This is a sponsored article authored by Rohit Arora, CEO, Biz2Credit.