Tax incentive. Picture: THINKSTOCK
Tax incentive. Picture: THINKSTOCK

New Delhi — Confusion and uncertainty have swept through India’s $2-trillion economy as businesses and consumers alike attempt to navigate a new nationwide sales tax that replaced a spider web of more than a dozen state and territory taxes and levies.

The new goods and services tax, formally ushered in at a late-night session of parliament overnight on Friday, unifies 29 states and 1.28-billion people into a single market.

It is expected to expand India’s narrow tax base and increase government revenues and will count as the most important economic reform of Prime Minister Narendra Modi’s three-year-old administration.

The government expects the unified tax structure to improve the ease of doing business and to boost foreign investment.

"This will lead to increased compliance and give us an opportunity to make tax rates more reasonable, apart from leading to higher collections and providing strength to the economy," Finance Minister Arun Jaitley told an indoor stadium packed with accountants in New Delhi on Saturday.

"It is my belief that there will be some pain when there is a change and one where technology is involved."

On the first day of its implementation, many shops were closed and consumers stayed away in droves, deterred by the change in prices and uncertainty over how the tax would work.

Car dealerships across the country were taking time to adjust to the new regime, with some saying they had not received revised prices under the general sales tax and could not record any sales billings.

"It’s like the day after demonetisation," said Praveen Arora, who runs AVM Computer in the capital, New Delhi, referring to the government’s sudden decision in November 2016 to withdraw 86% of the country’s currency from circulation.

"People are confused. And the way the rates of technology products have been raised, it’s hit sales very hard — people are expecting to be billed at the old rates," he said.

In the Chandni Chowk market in Delhi, spice wholesaler Sanjay Khandelwal had not processed a single sale on Saturday, even though tax rates on his spices remain the same.

Retail buyers were worried, he said, because they were unsure about the new system and there was talk of police checking the trucks of merchants who had bought from wholesalers like him. "Today, the shop is empty," Khandelwal said. "Our customers are scared of being harassed by the police."

Businesses are put off by the tax’s complicated structure, which includes four tax slabs ranging from 5% to 28% as well as numerous exemptions. And it is not clear what sort of damage the nationwide roll-out will inflict on the country’s economy before the long-term benefits kick in.

Bloomberg

 

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