Small businesses in India are in a state of confusion following the implementation on Saturday (July 1) of a groundbreaking new Goods and Services Tax (GST).
The tax form is intended to bring together and simplify the multitude of taxes that each of the country’s 29 states charge consumers and producers, and in so doing lower India's cost of doing business, but the structure is complicated – it includes four tax bands.
Businesses must file 37 forms a year (three monthly and one annually - see here) - though firms with sales of less than two million rupees ($30,800) are exempt from charging GST.
Despite media reports of some small businesses shutting shop temporarily, the finance ministry said the first two days after the rollout of GST had passed “without any major problems being reported”.
In addition India’s revenue secretary Hasmukh Adhia (pictured above) said today that in the case of retailers, such firms will have to just file one return form as the two other forms will be auto populated.
Adhia explained last week that the multiple rates were decided upon because India has a mix of rich and poor. "In our country, where there are different strata of society to be looked after, it's not possible to have an ideal GST," he said.
Since the launch of the GST portal on June 25, 223,000 firms have joined the tax system.
Previously India taxed producers rather than both producers and sellers. Tax applied only to firms with sales of 15 million rupees. With the GST threshold set at 2 million rupees millions of firms will fall into the tax net for the first time.
An agent from Crisil SME Ratings in May said the lower tax burden under GST will reduce the cost of raw materials and logistics, while increasing for those in the services sector.
But the tax is bad news for small firms hesitating to shift into the formal economy. (India has cancelled the registration of more than 100,000 companies which were "in violation of laws", Prime Minister Narendra Modi said on Saturday)
In addition India's Financial Express says India’s top rate of 28% makes it the country with highest GST rate going past Argentina that levies 27% tax on goods and services.
Ultimately GST is likely to reduce red tape and improve India's competitiveness, while increasing the tax base needed for India to fund the rollout out things such as better education and more infrastructure.
While some small business associations have called for subsidies to allow small firms to weather the changes, Indian authorities should rather look to help move more Indian SMEs onto the internet and provide better tax help. In the end there's no gain without pain.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a