India's New Tax System Sparks Strikes and Protests

By Corinne Abrams in Mumbai and Anant Vijay Kala in New Delhi Features Dow Jones Newswires

India's ambitious plans to overhaul the country's complex tax structure is triggering strikes, protests and delays as businesses say they aren't ready for the new system, which is set to start on Saturday.

Continue Reading Below

India has millions of tiny businesses that are going to be caught up in the tax net for the first time under its new goods and services tax. Most say they need more help and more time because they don't have the computers, the internet connection or even the basic knowledge of how much they owe.

More than 50,000 textile traders are on strike this week, shutting their shops for three days through Thursday, in Prime Minister Narendra Modi's home state of Gujarat to protest the tax, Manoj Agrawal, president of the Federation of Surat Textile Traders Association said.

"We will spend our time filing the returns instead of doing business," Mr. Agarwal said. "Some of our members even don't know how to operate a computer. How can they even file their returns?"

The Confederation of All India Traders, said this week that about a third of the association's 60 million members still don't have a computer to register on the government's tax network. It has asked authorities not to act against traders for lapses in compliance until March.

Another national association of businesses, the All India Manufacturers Organisation, urged the government to allow small businesses more time to comply. The government has already relaxed the rules for filing returns for two months after implementation.

Continue Reading Below

"This is going to be creating chaos," said K.E. Raghunathan, president of the association.

While the long-delayed implementation of the goods and services tax--which different governments have been trying to pass for more than a decade--is seen as positive step for the economy and a watershed moment for Mr. Modi, how smoothly it goes in the coming months could affect the prime minister's popularity as well as India's position as the world's fastest-growing large economy.

"It seems like a well-formed concept but there could be lots of problems in implementation," said Bill Adams, an economist at PNC Financial Services Group.

Mr. Modi needs to avoid the kind of market disruption that came with his previous big economic move, the voiding of close to 90% of the country's currency late last year to fight corruption, counterfeiting and other crimes. It was a painful speed bump for growth and Indian citizens who had to stand in line for hours to exchange their old notes for new ones.

The government says businesses need to adjust because it plans to go through with the new tax system, which is expected to draw in millions of new taxpayers and provide vital funds for infrastructure, sanitation, education and health.

"The rollout of the Goods and Services Tax on July 1 will, in a single stroke, convert India into a unified, continent-sized market of 1.3 billion people," Mr. Modi wrote in The Wall Street Journal earlier this week.

There is a general consensus among economists, executives and policy makers that the new system will eventually bolster economic expansion, but they warn there will be some short-term pain for that long-term gain.

The government's crackdown on cash in November contributed to a slowdown last quarter, putting India's growth behind China's for the first time in two years.

Growth decelerated sharply to 6.1% in the three months through March, from 7% in the preceding three months. China's economy grew 6.9% last quarter.

The coming quarters could see a similar hit from GST, economists said.

Companies say they will be buying and investing less as they adjust to the new system that will require India Inc. to file billions of documents each month. This will likely hurt growth this year. The extent of damage will be determined by how quickly India's businesses and bureaucrats can adjust.

"It is a mammoth exercise and anybody looking for efficiency gains in the near term is going to be disappointed," said Radhika Rao, India economist at DBS.

Analysts expect the kinks to be worked out and India to be back to normal by the end of this fiscal year. Some economists predict it could eventually add close to 1 percentage point to India's growth.

Debiprasad Nayak contributed to this article.

Write to Corinne Abrams at corinne.abrams@wsj.com and Anant Vijay Kala at anant.kala@wsj.com

India's ambitious plans to overhaul the country's complex tax structure are triggering strikes, protests and delays as businesses say they aren't ready for the new system, which is set to start on Saturday.

India has millions of tiny businesses that are going to be caught up in the tax net for the first time under its new goods and services tax. Most say they need more help and more time because they don't have the computers, the internet connection or even the basic knowledge of how much they owe.

More than 50,000 textile traders are on strike this week, shutting their shops for three days through Thursday, in Prime Minister Narendra Modi's home state of Gujarat to protest the tax, said Manoj Agarwal, president of the Federation of Surat Textile Traders Association.

"We will spend our time filing the returns instead of doing business," Mr. Agarwal said. "Some of our members even don't know how to operate a computer. How can they even file their returns?"

The Confederation of All India Traders said this week that about a third of the association's 60 million members still don't have a computer to register on the government's tax network. It has asked authorities not to act against traders for lapses in compliance until March.

Another national association of businesses, the All India Manufacturers Organization, urged the government to allow small businesses more time to comply. The government has already relaxed the rules for filing returns for two months after implementation.

"This is going to be creating chaos," said K.E. Raghunathan, president of the association.

While the long-delayed implementation of the goods and services tax -- which different governments have been trying to pass for more than a decade -- is seen as positive step for the economy and a watershed moment for Mr. Modi, how smoothly it goes in the coming months could affect the prime minister's popularity as well as India's position as the world's fastest-growing large economy.

"It seems like a well-formed concept but there could be lots of problems in implementation," said Bill Adams, an economist at PNC Financial Services Group.

Mr. Modi needs to avoid the kind of market disruption that came with his previous big economic move, the voiding of close to 90% of the country's currency late last year to fight corruption, counterfeiting and other crimes. It was a painful speed bump for growth and Indian citizens, who had to stand in line for hours to exchange their old notes for new ones.

The government says businesses need to adjust because it plans to go through with the new tax system, which is expected to draw in millions of new taxpayers and provide vital funds for infrastructure, sanitation, education and health.

"The rollout of the Goods and Services Tax on July 1 will, in a single stroke, convert India into a unified, continent-sized market of 1.3 billion people," Mr. Modi wrote in The Wall Street Journal earlier this week.

There is a general consensus among economists, executives and policy makers that the new system will eventually bolster economic expansion, but they warn there will be some short-term pain for that long-term gain.

The government's crackdown on cash in November contributed to a slowdown last quarter, putting India's growth behind China's for the first time in two years.

Growth decelerated sharply to 6.1% in the three months through March, from 7% in the preceding three months. China's economy grew 6.9% last quarter.

The coming quarters could see a similar hit from GST, economists said.

Companies say they will be buying and investing less as they adjust to the new system that will require India Inc. to file billions of documents each month. This will likely hurt growth this year. The extent of damage will be determined by how quickly India's businesses and bureaucrats can adjust.

"It is a mammoth exercise and anybody looking for efficiency gains in the near term is going to be disappointed," said Radhika Rao, India economist at DBS.

Analysts expect the kinks to be worked out and India to be back to normal by the end of this fiscal year. Some economists predict it could eventually add close to 1 percentage point to India's growth.

--Debiprasad Nayak contributed to this article.

Write to Corinne Abrams at corinne.abrams@wsj.com and Anant Vijay Kala at anant.kala@wsj.com

(END) Dow Jones Newswires

June 28, 2017 08:50 ET (12:50 GMT)