India Rolls Out Historic Tax Reform

New Goods And Services Tax Rolls Out On Schedule

At the stroke of midnight on July 1 the Indian government officially kicked off its new tax schedule knows at Goods and Services Tax (GST). Despite doubts among some Indian businesses that the country may not be ready for the transition, the new tax reform aims to create a “unified” market in India.

So as firms rush to comply with the new GST and small traders reluctantly get pulled into the tax net, the potential medium to long-term benefits are large but adjusting to the new system will disrupt business-as-usual. After a decade in the making, the new GST has finally been put into effect in India, albeit in a less-than-perfect form with multiple tax slabs that are bound to cause confusion among firms and consumers.

For example, unpacked food grains will not be taxed while any wrapped in a sealed plastic bag with however small a brand name on it will attract a 5% tax levy. As a result, retailers are protesting this tax on packaged raw food products, arguing that they are of better quality and therefore, should not be taxed. Current reports related to the reaction of the new GST have been mixed, with some shopkeepers complaining that they had to turn away consumers as they did not have their GST registration number or they were unable to migrate their systems to the new software. Small shops in India do not even have their records computerized.

For others, however, it was relatively smooth sailing, with businessmen saying that they will likely feel the impact only at the end of the month. Stocks at many stores are at bare minimum level, having de-stocked ahead of the GST rollout and consumers are expected to put off purchases until the confusion reduces.

Short-term Disruptions Inevitable

Short-term disruptions are inevitable, as noted in a May 25th report by London-based TS Lombard, an independent research firm, the new GST rollout “threatens supply disruptions”. Consumer goods companies, for instance, explains the firm, have stated that the implementation “will not be easy” as the hundreds and thousands of retailers, wholesalers and distributors in the country need to be compliant.

And the fallout is likely to prolong for 2-3 months at the very least for organized companies. Varun Berry, managing director of biscuit maker Britannia, stated in a television interview that he expects a 5-10% downturn in his company’s revenue in the current quarter. The informal sector, however, will be dealt a big blow as the competitive edge they had in terms of pricing will get eroded with their businesses being forced to enter the tax net.

While this is good news for investors as stocks of listed companies will benefit over the medium-to-long term due to higher growth and greater efficiency of the tax system, it raises concerns about the slow pace of job growth in India and how the growing workforce will be productively employed in an economy where the informal sector is estimated to employ 90% of the working population.

For now, the government’s focus will be on implementing the GST as smoothly as possible, and in particular ensuring that the technological backbone that will need to handle the billions of tax invoices that will.