‘The party will be over’: How GST will affect businesses that don’t pay tax

business

Updated: Jul 06, 2017 09:58 IST

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%, 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., 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, a French catering and food service company, said it has mandated GST-compliance as one of the eligibility criteria for its orders.

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A REVAMP 17 YEARS IN THE MAKING India is all set to keep its July 1 date with the Goods and Services Tax (GST), a reform that has been in the making for 17 years. GST will unify India into one market place with one uniform tax, shore up government revenue and is expected to spur economic growth. Timeline of the long journey to GST rollout:

2000 Vajpayee government started discussion on GST by setting up an expert panel headed by Asim Dasgupta, former West Bengal finance minister 2003 The Kelkar Task Force suggested the need to have a comprehensive indirect tax reform through GST 2006 UPA finance minister P Chidambaram proposes GST in his Union budget. The Empowered Committee (EC) of state finance ministers was assigned the responsibility to chalk out a road map for its implementation 2008 Empowered Committee submits a report ‘A Model and Roadmap for GST in India’ 2009 The EC after holding discussions with the Centre and the states submits the first discussion paper 2011 Constitution Amendment bill introduced in Lok Sabha and referred to the Standing Committee on Finance for scrutiny 2013 Standing Committee submits its report to Parliament. But UPA government fails to take the legislation forward. The bill lapses with the dissolution of the Lok Sabha 2014 Finance minister Arun Jaitley introduces the Constitution (122nd Amendment) Bill, 2014 in Lok Sabha on December 19 2015 Jaitley in his budget speech sets GST rollout deadline on April 1, 2016. Lok Sabha approves the bill on May 6. The Congress demands capping GST rate at 18%. The NDA government fails to get it passed in Rajya Sabha 2016

■ Centre and states agree on Constitution Amendment Bill without a cap on the rates. The bill is approved by the RS on August 2016. The amended bill is passed in the LS on August 8

■ The GST Council headed by the Union finance minister is formed. The council decided on a four-slab rate GST structure of 5%, 12%, 18% and 28%. The ‘sin’ or "demerit" products such as tobacco items, aerated drinks and luxury cars, would come under the highest tax slab and may attract a cess, which could raise the tax burden to 40% 2017 The date for the implementation of the new tax structure is shifted to July 1, 2017, as the Centre and states took time to finalise the draft bills— CGST, IGST, SGST and UT-GST

May: GST Council during its meet in Srinagar fixes rates of goods and services

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.”