MUMBAI, India — For the second time in less than a year, the government of Prime Minister Narendra Modi is putting India through a revolution in the way the country does business.
In the fall, the government imposed one of the most radical monetary experiments ever, abruptly banning most of the country’s currency notes in an effort to stem corruption.
Now, it is instituting the country’s biggest tax overhaul since independence. On Saturday, a nationwide sales tax replaces the current hodgepodge of business taxes that vary from state to state and are seen as an impediment to growth. It is expected to unify in a single market 1.3 billion people spread over 29 states and seven union territories in India’s $2 trillion economy.
India, long one of the fastest growing economies in the world, has begun to lag in recent years. Mr. Modi came to office in 2014 with a promise to recharge the economy with the same business-friendly policies he introduced so successfully as the leader of Gujarat State. But he has been increasingly criticized for falling short, taking half-measures and shying away from the tough issues of overhauls to labor and land.Continue reading the main story
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Even the prime minister’s ban on India’s largest currency notes, while a daring step, has come under criticism as growth has slowed to 6.1 percent in the first quarter of this year, down from 7.9 percent a year earlier.
With the introduction of the new goods and services tax, the government is hoping not just to streamline the myriad levies on businesses but to quiet the critics who say Mr. Modi has failed to deliver on his policy promises.
“This would be almost a test for Modi himself,” Harsh Pant, a fellow at the Observer Research Foundation, a New Delhi think tank, said of the new sales tax. “If it goes really badly, he’ll be in for trouble” in national elections in 2019.
Mr. Modi survived the chaos caused by his currency move last year by convincing the poor that cash shortages and lost wages were worth enduring in the fight against India’s endemic corruption. He also argued that the rich were hit the hardest as holders of most of the illicit cash, known as “black money,” that his currency ban aimed to render worthless.
Now, with the new tax system about to take effect, some are questioning whether it will live up to its billing as a radical simplifier of business taxes that will spur growth, or whether it will turn out to be just as complex as the one it is supposed to be simplifying.
In a possible sign of Modi government concern about how the public will accept the new tax rules, a Bollywood superstar, Amitabh Bachchan, has been enlisted for promotional videos in which he appears with the colors of the Indian flag on his face and proclaims, “One nation, one tax, one market.”
India has been discussing the idea of substituting a broad sales tax for the jumble of federal and state levies for much of the past decade. The previous, Congress Party-led government supported the idea, and Mr. Modi’s Bharatiya Janata Party made the new sales tax part of its manifesto.
In many ways, the idea makes perfect sense. Facing an array of taxes from the central government and states, Indian businesses have a hard time building a nationwide business. Almost everyone seemed to agree that these taxes — excise, value added, sales and service levies, among others — should be replaced with a single sales tax.
Experts estimated that moving to a single tax would add a hefty two percentage points to India’s growth rate.
But in practice, getting the goods and services tax adopted proved a dizzying challenge. It required not only a constitutional amendment in Parliament but also approvals from India’s 29 states and seven union territories, many ruled by political parties with widely divergent interests.
To win approval, the central government assured the states that it would make up any deficit in tax revenue they experienced for the next five years. The government also pledged to keep new tax rates as close as possible to existing rates, but that seemingly simple objective presented a host of obstacles.
So instead of a single flat rate, in the new system, laid out in meticulous detail in a 213-page guide, there are rates of 5, 12, 18 and 28 percent. There are also many exceptions.
Take wood, for instance. In its various manifestations, wood finds its way into every tax bracket. There is a 5 percent tax on wood chips and particles, for example, while the rate is 18 percent on sawed lumber.
Tax rates can also vary depending upon the wholesale price. For example, the kurta shirts at Rizwan Siddique’s air-conditioned store in Crawford Market in Mumbai are to be taxed at 5 percent if their price is under 1,000 rupees, or $16, and 12 percent if they are priced higher.
Add to that a requirement that businesses make 37 online filings a year, and it is not hard to see why some businesses are complaining.
Santosh Dalvi, a partner at KPMG India, an accounting firm, said confusion was widespread. “Things have become very unmanageable, everywhere,” he said, adding: “There are a lot of open areas, a lot of gray areas. From a business perspective, people need to take a decision. It’s becoming quite challenging.”
Others say that in a country as complex as India, it is unrealistic to expect a simple tax system.
“If we came out with one flat tax on everything, there would have been protests in the streets,” said Archit Gupta, founder and chief executive of ClearTax, one of India’s biggest companies selling software to file tax returns online. “We’re such a complex country.”
Given the stark inequality in India, taxes on items used by the poor need to be lower than luxury items, Mr. Dalvi said. So carbonated drinks that only the middle and upper classes can afford are taxed at 28 percent under the new system, with an additional 12 percent levy. Tea and coffee, consumed by rich and poor alike, are taxed at 5 percent.
The new tax code applies to businesses with annual revenue above 2 million rupees, or about $31,000. And in a country legendary for tax avoidance, the system encourages compliance by reducing taxes for businesses if they can show taxes were paid earlier in the production or selling chain.
“I have strong incentive to buy from G.S.T.-compliant companies,” Mr. Gupta said, referring to the goods and services tax. Companies that do so can pay less money in taxes by claiming credit for taxes paid along the production process, he said.
In the short term, at least, most agree that the new system will impose a hardship on small businesses, many of whose owners have never operated a computer and will have trouble complying with the requirement to file 37 times a year online.
In Chandni Chowk, one of the biggest markets in New Delhi, traders held three days of protests this week over the new system.
“G.S.T. is like a mountain of sorrows for us,” said Mukesh Sachdeva, 61, the third generation in his family in the fabric business.
“There are not many educated people in this trade,” Mr. Sachdeva said. “In our shops, we don’t have space to keep a computer and computer operator.”
At Crawford Market, one of Mumbai’s largest, Subash Jain, 62, was similarly concerned.
“I’m fully convinced that I’ll be facing difficulties in billing, sales and paperwork,” he said, chatting in a friend’s store a few doors down from his shop, previously run by his father, which sells fabric for suits and shirts.
“I have to hire an accountant plus a tax advocate and a computer,” Mr. Jain said. “I have to hire a computer operator who will take a salary.”
There is one business that is booming, and that is India’s online tax filing companies. ClearTax, for one, has developed software for filing the new sales tax paperwork and is holding 11 training sessions daily that are attended by roughly 2,000 people, Mr. Gupta said.
Many attendees are accountants who are desperately trying to understand the new code.
All of the change is likely to slow down business and add to costs, at least in the short run, many experts say. But they say that if it all goes well, businesses, and India, stand to grow in the medium and long term.
Nobody has more riding on this than Mr. Modi. Small-business owners, who formed his political base in the last election, are already upset by the hit their largely cash-based businesses took during the currency ban last year.
The government, said Mr. Pant, the Observer Research Foundation fellow, may be relying too heavily “on the prime minister’s popularity.”
“I’m quite confident it’s not going to be seamless,” he said.