In the current haze of global politics, many countries and different political factors within them have become almost overlooked. After all, no one can seem to take their eyes off of America, Russia, or the European powers right now. Although, an interesting development in India has taken a foothold that will undoubtedly reshape its economic future.
Starting in July of this year, India has implemented a new tax code (Goods and Services Tax) that replaced the multilayered, and state/territory sanctioned system with a national sales tax in an effort to both annual economic growth. India, which has previously boasted one of the fastest growing economies in the world, has recently seen a plateau in economic growth. Prime Minister of India, Narendra Modi, has taken drastic steps to curb the country’s problems of economic corruption and promote growth, going so far as to ban the largest bills of India’s currency to eliminate the influence of counterfeit cash (referred to in India as “black money”). Though Modi’s newest reform regarding taxes is the largest since India’s independence in 1947.
Tax Reform in Wide Strokes
To fully comprehend the changes that the national sales tax implemented, one must keep in mind that India’s market system essentially broke down on a state level. Before the GSP was initiated, border checks and tax inspectors delayed the travel time for goods that traveled across state and territory borders, which hindered businesses’ ability to be nationally active. Furthermore, a tax system that is so divided is far more difficult to regulate. By forcing India into a unified market, smaller businesses would have a better chance of growing, and would especially benefit businesses in landlocked states to export goods. However, this system also created many difficulties for taxpayers and government bodies.
The GST would need the approval of all 29 states and seven territories and a constitutional amendment to be enacted. In order to gain approval from the divided government entities, India’s government agreed to compensate for any loss in tax revenue that the GTP may impose, and agree to a meticulous tax bracket system that covers nearly every tradeable commodity. Four brackets are used within the system, which include a 5, 12, 18 and 28 percent sales and services tax. Furthermore, businesses would need to submit 37 online tax filings a year to prove cooperation, as India has a history for alarmingly high rates of tax evasion.
Effects of the New Policy
The social and economic impact that the GST will, and has, had is perhaps best summed up by Harsh Pant, fellow at New Delhi’s Observer Research Foundation, who stated, “This would be almost a test for Modi himself. If it goes badly, he’ll be in trouble [in the 2019 election].”
Many small business owners are having a hard time keeping up with regulations regarding the goods they sell, as wholesale prices can alter the tax bracket under which a good is placed. Some goods, such as tea and coffee, can find their way into all four tax brackets depending what type of coffee or tea is being sold. In theory, creating sales tax brackets would allow the poor to pay for the more essential, inelastic goods like rice and drinking water by placing them into lower tax brackets, and raise the tax on goods like soda and vehicles that only the middle and upper class can afford.
Many small business owners are also having to deal with the issue of submitting invoices online, as a large number of them have never even turned on a computer before. The use of handwritten invoices is still in wide use in India, and owners may have to resort to hiring computer operators to help file taxes.
“We have jumped into a river, but don’t know its depth,” said A. Subba Rao, executive director at the CLP India power firm.
The fabric industry, which in India consists of a 60 percent informal workforce, is lashing back at the new regulations. Protests ensued as workers feared that consumers would switch to cheaper clothes imported from China or Bangladesh, and that the industry would not survive such changes.
Politically, this action does not bode well for Modi, as small business owners were the backbone to his political campaign in 2014. Although, it is expected that the GST may increase the nation’s GDP by up to .4 points in the future.
Contact an India law firm today if you need help understanding the new tax code.