GST rules and its impact on Indian business

By:Vandita Jadeja 2017-08-06

In order to reduce tax evasion and to make it easier for companies to transact, the Government of India introduced the biggest tax reform. A month after its implementation, many businesses are finding it complicated and complex. The firms have confusion about the pricing of their products and the unclear rules are not making it any ease. This has hurt sales and is hampering economic growth as well.

For example, airlines are uncertain whether to tax premium economy seats as economy or business class, which means at the rate of 5% or 12%. Similarly, auto repair shops face a similar problem as GST rates vary for different jobs. People either overcharge or undercharge for their work.  Even computer maker HP Inc. is seeking clarity on the issue. Under GST, the desktops and laptops are taxed at 18% while printers and monitors are taxed at 28%. They are unclear about the rate to be charged on the same. GST is the biggest tax reform in the country and has replaced more than a dozen levies. It is meant to unify the country into a single market. While troubles with transition were expected, the ensuing chaos has some officials worrying about the repercussions for the economy. The annual growth has slowed down in the January-March quarter and it is at its weakest in the last two years. If the growth slows down further, the finances would face pressure.

A survey carried out by Tally Solutions found that more than 40% of small businesses were still not up to speed on how GST functions and many hadn’t yet installed the software as well. An active outreach program has been launched in New Delhi to educate companies and explain the different provisions of the new tax. This has become a crash course for the officials in the new tax structure.

For some companies, the transition to GST has been anything but smooth. ITC Ltd, the tobacco firm was blinded by further rule changes after the implementation of GST. Such firms lost more than $7 billion in the stock market value after the government hiked cigarette taxes. This hike was because the government believed that the GST had unintentionally handed tobacco companies a windfall profit. Further, a couple of Indian states raised the local taxes or imposed new levies to challenge the GST.

GST was implemented with an aim to boost the economy of India by atleast 2% points. But the complex structure led to the marking down of expectations. The growth dividends are only expected to accrue over a long period of time. Currently, GST has failed to bring any harmony in the tax structure or to bring the various businesses under a single tax regime. With an increased complexity, there is a difficulty in implementation and a very slow economic growth. The Government hopes for a higher growth after September, when most of the business would have registered under the GST.

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