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Economy

Uncertainty hangs over businesses on India's first day with GST

Reactions to new tax regime include approval, resignation, confusion, evasion

Bookstore owner Rajeev Chawla thinks everybody should be GST compliant and foresees no adverse impact on sales. (Photo by Kiran Sharma)

NEW DELHI/RAIPUR -- On Saturday, the first day of India's new goods and services tax (GST), many small traders appeared unprepared to embrace the landmark economic reform, complaining about complicated requirements and a lack of clarity.   

The country's biggest indirect taxation reform since independence from British rule in 1947 was launched in a grand ceremony in the national parliament at the stroke of midnight on Friday by President Pranab Mukherjee and Prime Minister Narendra Modi.

The GST regime replaces over a dozen confusing levies with a unified nationwide system. Almost all goods and services have been reclassified at one of four GST rates: 5%, 12%, 18%, and 28%.  

Sushil Kumar Narula, a textiles merchant who sells both unstitched and ready-made fabrics in New Delhi, says he will sell off old stock at pre-GST prices and will charge new rates when he resupplies.

Sushil Kumar Narula, a textiles trader in New Delhi, is unhappy with the 5% GST on unstitched fabric, which was previously tax-free. (Photo by Kiran Sharma)

Narula is unhappy with 5% GST on previously tax-free unstitched materials, and is uncertain whether he will have to absorb this if he sells old stock at the same price to his customers.  

"My chartered accountant has also not clarified how to go about this," said Narula, whose annual business turnover exceeds 7.5 million rupees ($115,000). "He says he himself has not received any information from the government."

Both Narula and his son Amit, who runs another garment shop, have registered their businesses for GST, which entails computerization.

"Every sales detail has to be given electronically," says Narula. "Apart from a computer with the required software, I need a scanner, printer, barcode machine, and cartridges. I'll have to spend about 40,000 rupees on all this, and may hire some computer expert to work for me on this complicated procedure."

Amit said most small merchants are used to preparing transaction documentation manually, and are finding it very difficult to go electronic.

"Those over 60 will have an especially hard time," he said. "My father can't even operate a touchscreen phone comfortably, so how will he manage all these transactions online without help?" 

Rajeev Chawla sells textbooks, and is already displaying his GST registration at his store entrance. He foresees no impact from GST on sales. "Everybody should be GST compliant now," he said. "By showing my registration number, I'm telling customers, 'Look, I'm very much part of the new tax regime.'"

Brothers Sanjeev and Ramesh Arora run a Monginis franchise selling cakes and pastries, and have no plans to pass the minimal tax increase on to customers over the coming three months.   

Brothers Sanjeev and Ramesh Arora say the 1% overall increase in their bakery costs is too small to pass on to customers for now. (Photo by Kiran Sharma)

"We are selling at the same rates as before GST," said Ramesh. "There's a marginal 1% increase in production cost which the company is bearing initially. GST is just the merger of the taxes we were paying before -- now we have only one collective tax."  

In Raipur, a central Indian city 1,250km by road from New Delhi, a white goods and consumer electronics store was lacking both products and customers on Saturday. The barren display areas are usually filled with different brands of refrigerators, air conditioners, and televisions.

These items are now in the top 28% GST band. They had been subject to a 14.5% tax (and a 16% excise duty). With a 13.5% gap between the old and new tax regimes, the store stopped restocking for 45 days. With fewer products available, sales in June were down 90% on an average month. "We support the tax reform, but it was planned by those who don't know business at all," said the shopkeeper, who plans to sell off his remaining stock using invoices dated in June. "Otherwise, we will have to pay 13.5% from our pocket, which is much more than our normal profit margin of 4 to 5%," he said.

Some small retailers are planning simply not to pay GST. "I won't," said a shoe seller at a Raipur market, turning his face away. Shoes costing up to 500 rupees ($7.7) are subject to 5% GST. "I know the GST started today, but most probably we are not paying the tax," said the owner of an electrical shop

Since unpackaged and unbranded food do not fall under the GST regime, it is having limited impact in the ordinary market environment, and many shoppers were unaware of the historic and politically sensitive tax reform. A random sample taken by the Nikkei Asian Review in a fresh market in Raipur found only two in twenty people able to name the new tax. This limited awareness could limit the political fallout from the reform.  

White goods and consumer electronics are now in the top GST 28% band, causing headaches for vendors with old stocks. (Photo by Yuji Kuronuma)

In the western city of Mumbai, the country's financial hub, few small traders seemed to welcome GST. "I don't really understand what GST is," said a salesperson at a school goods shop who has been used to paper vouchers. "It is very difficult for most of us to be compliant," he said, predicting two or three months for the system to become understood.
"We don't want to pay more taxes but there's no option for us," said the owner of an off-license. Alcoholic beverages are among the few exemptions from GST, and individual states will be able to tax them as before. But since GST applies to goods and services used in brewing and distilling, production costs will go up.  

Mati Rahman, a clothing retailer, wholesaler, and exporter based in Mumbai's busy Crawford Market, plans to halt his wholesale business, including for export, until there is more clarity on bulk sales. "This GST is lethal for small businesses like ours but we can do nothing but comply," he said. "I will bear losses on my existing wholesale stock."

Amid the negative sentiments, there is good news for travelers at least. Local agents for Thomas Cook confirmed that tax on travel packages has fallen from 9% to 5%.  

Nikkei staff writers Akira Hayakawa and Rosemary Marandi in Mumbai contributed to this report.

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