"Party's over" for millions, as India launches biggest-ever tax reform

KAYA

29/06/2017 16:28

* India set to roll out new sales tax on July 1 
    * Peer pressure forcing firms to comply with GST 
    * Experts see up to 4 percentage points boost to tax-GDP 
ratio 
    * New tax seen benefiting large formal players 
 
    By Rajesh Kumar Singh and Manoj Kumar 
    NEW DELHI, June 29 (Reuters) - Rakesh Sachdeva sells auto 
parts in a busy market in central Delhi, just a few miles from 
Prime Minister Narendra Modi's office. Yet despite having a 
flourishing business he does not pay any tax. 
    Until now, his rundown premises and small scale operation 
has kept the business below the radar of India's tax officials. 
Come July 1, however, "the party will be over", says the 
51-year-old, with a resigned shrug. 
    A nationwide Goods and Services Tax (GST), set to come into 
effect on Saturday, has faced criticism for its complex design. 
But the country's biggest tax reform since independence is 
promising to bring millions of firms like Sachdeva's into the 
tax net, boosting government revenues and India's sovereign 
credit profile. 
    The new tax will require firms to upload their invoices 
every month to a portal that will match them with those of their 
suppliers or vendors. 
    Because a tax number is needed for a firm to claim a credit 
on the cost of its inputs, many companies are refusing to buy 
from unregistered businesses. Those who don't sign up risk 
losing any customer who has. 
    "I have no option, but to register with the new system," 
said Sachdeva, who spoke to Reuters on condition the name and 
precise location of his shop were not disclosed.  
     
    BOOSTING THE COFFERS 
    Improved tax compliance should shore up public finances, 
augmenting resources for welfare and development spending and 
giving a lift to the $2 trillion economy. 
    India currently has one of the worst tax-to-GDP ratios among 
major economies at 16.6 percent, less the half the 34 percent 
average for the members of the OECD and also below many emerging 
economies. 
    While there is no official estimate of the potential fiscal 
gain, some tax experts say the measure, after the initial 
teething trouble, would lift the tax-to-GDP ratio by as much as 
4 percentage points as the number of tax filers is estimated to 
more than treble to 30 million. 
    "In future, compliance is going to be extremely crucial," 
Rajiv Nair, chief executive officer at Kaya Ltd.  KAYA.NS , told 
Reuters. "Since we are also responsible for compliance across 
the supply chain, we have to ensure that the suppliers we have 
are in a position to work with us in a compliant manner." 
    Nair's company, which makes beauty and personal care 
products, has just streamlined its supply chain, dropping 
vendors that were not going to be GST-compliant. 
    Other companies are doing the same. Elior Group  ELIOR.PA , 
a French catering and food service company, said it has mandated 
GST-compliance as one of the eligibility criteria for its 
orders. 
     
    WINNERS AND LOSERS 
    The unorganised sector of India's economy is vast, employing 
an estimated nine out of 10 workers. 
    While staying outside the GST regime risks losing business, 
joining it will necessitate an overhaul of firms' accounting 
systems and an investment in technology.   
    The new tax system requires three filing a month plus an 
annual return - a total of 37 filings - for each of India's 29 
states in which a firm operates. For smaller companies operating 
on wafer thin margins, hiring accountants and technical staff 
could substantially dent their bottom line. 
    Sanjiv Mehra, head of a traders' body in Delhi, reckons a 
"prohibitive" cost could prove to be counterproductive. 
    "Compliance is needed for input tax credit," he said. "But 
what if you are in a business where margins are strong and 
allows you to forsake credit?" 
    But despite its flaws, many analysts think the new tax will 
be good news for bigger established businesses, because it will 
sweep away an array of federal and state sales taxes, levied at 
different stages of the supply chain, that often result in 
double taxation. 
    The government estimates the GST will save companies around 
$14 billion because it will allow them to organise their 
warehouses and supply chains more efficiently. 
    Firms can now move to demand-based "hub-and-spoke" models 
used globally, rather than operating state-by-state. 
    "Those companies which can wring out the maximum cost 
efficiency are the ones investors should bet on," said Ajay 
Bodke, head of portfolio management services at financial firm 
Prabhudas Lilladher in Mumbai. "All consumer-facing industries 
will be big beneficiaries of the GST." 
 
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GRAPHIC-Indirect tax rates in Asia-Pacific    http://tmsnrt.rs/2tR17q7 
GRAPHIC-India's GST launch    http://tmsnrt.rs/2rzfxsn 
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 (Reporting by Rajesh Kumar Singh; Editing by Alex Richardson) 
 ((rajeshkumar.singh@thomsonreuters.com; +91-11-4954-8041; 
Reuters Messaging: 
rajeshkumar.singh.thomsonreuters.com@reuters.net)) 
 
Keywords: INDIA TAX/COMPLIANCE