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Indian Firms Grapple With New Goods And Services Tax

by Mary Swire, Tax-News.com, Hong Kong

04 July 2017


Small businesses in India have said they are struggling to comply with the new goods and services tax (GST), which was introduced after more than a decade of negotiations on July 1, 2017.

President Pranab Mukherjee, Prime Minister Narendra Modi, and Finance Minister Arun Jaitley officially launched the long awaited tax at midnight on June 30, with the Prime Minister observing that it represented "a decisive turning point" in the country's future course.

The centralized GST replaces numerous central and state levies, including CENVAT, the central excise duty, service tax, customs duties, state-level VAT, sales taxes, entertainment and gambling taxes, the luxury tax, certain entry taxes, and related state surcharges.

Modi suggested that the introduction of the GST in place of these many taxes will reduce costs, increase efficiency, and help to cut corruption.

Under the new GST regime there are two main rates – 12 percent and 18 percent – which are levied on most goods and services. A reduced five percent rate applies to some common, non-essential items, and a 28 percent rate is imposed on "luxury goods" and tobacco products. Some essential goods are subject to a zero rate, and services generally face an 18 percent rate.

There have been protests in India following the introduction of the levy, and concerns expressed about the currently high rate of tax non-compliance by traders. Compliant businesses have warned that they will face difficulties when dealing with those firms that refuse to comply with the regime or that are struggling to comply with the tax code for the first time. GSTs and VATs have a self-policing element, in allowing companies to claim input tax credits for tax incurred when purchasing inputs. However, a business cannot claim input tax credits if it has bought inputs from a non-registered business.

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) welcomed the reform however. It said: "With retail prices growing by the slowest pace in the last four years – 2.18 per cent – it is the perfect time for the launch of the Goods and Services Tax (GST), from an inflation point of view..."

It added that, against "the backdrop of subdued consumer demand, there is no reason for the industry not to pass on any benefit accruing from the GST. The top priority for the industry today is to step up its capacity utilization by increasing production, helped by consumer demand."

However, the body acknowledged that the implementation of the tax "may face some initial hiccups," particularly where supply chains include both compliant and non-compliant traders.

TAGS: compliance | tax | business | India | goods and services tax (GST) | manufacturing | small and medium-sized enterprises (SME) | micro business | retail | services

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