Analysts say the single taxation regime is good for the economy in the long run
One year on: GST still haunts some of the Indian businesses
Metro Shoes, like many other companies in India had to do an overhaul of how it did business a year ago – to get to grips with the introduction of a new goods and services tax, or GST.
The footwear retail chain put a new IT system in place to meet the GST invoicing requirements and its tax team underwent rigorous training to be able to comply with the new taxation regime.
“It was natural that there were a few issues in implementation of GST in our company,” says Alisha Malik, the vice president of marketing and e-commerce at Metro Shoes. “It changed the business processes regarding billing and filing of various returns.”
With the footwear market in India being largely an informal, unstructured sector, there was confusion all around and businesses took hit in the run up to the GST as well in the months following the implementation of the levy. However now, one year on, things have generally stabilised for Metro, Ms Malik says.
GST, launched on July 1 last year is one of the biggest economic reforms to take place in Asia's third biggest economy. It was long awaited, having been mooted more than a decade before it was finally effected, replacing a host of taxes across the country's 29 states with a uniform, single tax regime.
Under GST, different products come under different slabs, but are taxed at the same rate across the country.
“GST is definitely one of the biggest fiscal reforms that our country has witnessed,” says Dushyant Jani, the founder and chief executive of Mobclixs Technologies, a digital media firm based in Mumbai. “There is a long list of benefits, which are being claimed as a result of the GST law. We now only have to face a single goods and services tax instead of various excise, sales, [and] service taxes.”
But some businesses are still struggling with GST, particularly, the small businesses, many of which saw their costs base significantly expanding as they had to spend more on accountants' fees and IT infrastructure to comply with the online filing systems. Having to make more frequent tax payments under GST has sapped them of much-needed cash.
Himanshu Parekh, a sari trader in Mumbai, explains that the textiles manufacturing industry has faced challenge.
“The production part at the looms level which we get done at small towns and villages, labourers there had issues with the implementation of GST because they don't know how accounting functions,” he says.
It did not help that GST came into effect while many in India were still reeling from the impact of demonetisation, when the government scrapped the two highest value banknotes from circulation in November 2016. The combined effect of these two initiatives has put many smaller entrepreneurs out of business in India.
“Exporters have been really been disappointed with the GST roll out,” says Rahul Agarwal, the director of Wealth Discovery, a financial services company headquartered in New Delhi. “Delays in processing tax refunds under the new GST regime have locked up the funds of exporters, which has been a serious drag on their business. Exporters are struggling to stay competitive in the international markets.”
While the transition may be tough, many argue that India's economy will ultimately benefit.
“Unorganised sectors don’t want to become organised as they are still reluctant to pay taxes,” says Amit Kachroo, the managing partner at Aaneev Wealth, a asset and wealth management company. “There are certain businesses, which want to trade in cash only.”
But he says that GST is a positive step in the right direction as it is forcing many such businesses to clean up their processes and enter the formal economy, which will ultimately help reduce tax evasion and improve tax collections.
Although, the short-term impact was negative, some analysts forecast that in the longer term, GST's contribution to Indian gross domestic product could account for up to 2 per cent.
GDP growth slowed to 6.7 per cent in the financial year to the end of March, compared to 7.1 per cent a year earlier, according to figures from the Indian government. However, in the fourth quarter between January and March, growth picked up to 7.7 per cent, suggesting that things are taking a turn for positive.
Also, the tax base has widened under GST, with 11.2 million business registered under the new system compared to 6.4 million previously, official data shows and for its part, the Indian government claims that GST has been a success.
“The goods and services tax is one of the most significant systemic reforms that our country has undergone,” India's prime minister Narendra Modi, said on Tuesday, speaking at a conference in Mumbai. “It reduces tax cascading, increases transparency, and adds to logistics efficiency. All of this makes it easier for the investor to do business in India.”
The government introduced a number of changes to GST over the course of the year, as it has tried to manage some of the challenges. These adjustments included lowering the GST tax rates on items ranging from stationery and diesel engine parts -- both reduced from 28 per cent to 18 per cent. Rate of levy on dried mango for example was also slashed from 12 per cent to 5 per cent, as companies struggled in the wake of higher rates of taxation.
While smaller and medium-sized businesses took the brunt of GST, some of the larger companies in sectors such as real estate also felt the impact of the levy over the course of last year.
“For the real estate sector, GST has seen a mixed bag, with the sector still grappling to completely understanding it,” says Ramesh Nair, the chief executive and country head at property consultancy JLL India. “There are different tax computation methods for different projects and phases of the same project.”
Mr Nair admits that having a unified tax policy could “add to India’s attractiveness as an investment destination in the long run” and improve the ease of doing business, but says there is still a long way to go.
“The GST law still has to mature and compliance related processes need to be refined further,” he says. “It is important that the government ensure clarifications on major concerns, which need clarity and once and for all are addressed.”
Meanwhile, Ms Malik at Metro Shoes thinks that the tax system needs a bit of a time to wear in, and her company is already starting to see the benefits.
“Simplification of the tax structure and smooth movement of goods from one place to another are the main advantages,” she says. GST will be good "in the years to come”.