Good, bad and ugly of India's new national sales tax journey

If there's one word that sums up the response of India's businesses and consumers to the country's new national sales tax, it's 'confused.'

Will premium economy seats be taxed as economy class or business? Is a chocolate-coated biscuit a biscuit or chocolate? These are the questions now troubling businesses large and small across India's $2.3 trillion economy.

The roll out of the goods and services tax came less than a year after the government's shock withdrawal of 86 percent of the nation's currency, which helped knock India's GDP growth down to 6.1 percent from 7.1 percent in the January-March quarter and eliminated as many as 1.5 million jobs.

After more than a decade-long journey, the biggest tax reform since independence in 1947 became a reality on July 1, combining more than a dozen levies into one tax.

Many Indians responded by sharing their first GST bill on WhatsApp, Facebook and Twitter. The novelty soon wore off. Small traders and businesses struggled to issue invoices and battled with the new software, with some forced to provide handwritten invoices to customers.

In an attempt to cut through the confusion, the government held tax 'master classes' and published advertisements in the newspapers showing the revised prices alongside the old prices of goods.

About two dozen states of 29 have abolished check points at their borders, where tax compliance and goods inspections used to delay deliveries - often by days.

Yet while travel time has been reduced as tax inspectors disappear from the roads, transport department officials are still actively checking vehicles. Transportation of illegal goods has reduced because those businesses cannot provide GST-compliant bills.

"People are finding it tough to understand the GST," said Pradeep Singal, national president of the All India Transporters Welfare Association. "This has meant that companies had ordered in advance and are still using old stocks," pushing down transport business by 30 percent."

Traders, particularly in small towns, are struggling with their lack of knowledge of the new tax regime -- compliance obligations, raising invoices and accessing input credits, said Praveen Khandelwal, secretary general of the Confederation of All India Traders.

Small merchants and e-commerce companies are tripping over a dizzying array of documents and the complicated classification system that determines what percentage of tax will be charged. Thousands of small merchants have stopped selling on e-commerce sites because they can't meet these new requirements.

Add to that, there's multiple rates for various products. Footwear below 500 rupees ($7.70 U.S.) attracts one rate and above that price attracts a higher tax rate, leaving suppliers confused over which rate they should apply.

"Any new law would have interpretation issues," said Pratik Jain, national leader indirect tax at PWC India. "Like what rates would be charged for an economy-plus ticket issued by some airlines? It should be charged at economy rates."

Whether the GST network can seamlessly match billions of credits, facilitate tax collections, provide refunds and check evasions will be tested when most of the traders and companies file returns in September.

Businesses have not yet uploaded their sales and purchases invoices generated post-July 1 on the network, as that part of the system has not been functioning and companies have been allowed to file late returns for first two months.

"The biggest problem being faced right now is that the GSTN has still not formalized their format for firms to pay taxes," said Sachin Menon, national head of indirect tax at KPMG India. "We have some multiple revisions in format in the last couple of weeks alone. Companies providing GST software are having a tough time."

Small business owners, as well as traders and shopkeepers who have never turned on a computer, are scrambling to acquire the skills to navigate these technological challenges.

Prices of some products are varying according to location as traders have not fully implemented the new structure and profiteers have stepped in, hindering the creation of a single Indian market.

For instance, Maruti Suzuki India's Baleno Sigma gasoline model cost 635,000 rupees near Navi Mumbai in Maharashtra while the same model is priced at 664,952 in Bengaluru in Karnataka.

"A quick comparison of price of motorcycles and cars across the country reveals a convergence in price post-GST," equity analysts of Jefferies India Private, the unit of the global investment banking firm said in a July 13 note.

Movie tickets in Tamil Nadu and Maharashtra became costlier as the states imposed additional taxes, defeating the purpose of a unified tax. The federal government, however, has set up a panel of officials to monitor any price rise, shortage of commodities and implementation of GST.

Textile traders have been protesting to demand that fabrics be exempted from the tax. The government is reluctant to agree, saying it will break down the input tax credit chain.

The industry won't be able to sustain the rise in costs, given that 60 percent of the trade is in the informal sector, said S. Sunanda, secretary general of the Confederation of Indian Textile Industry, which represents more than 3,000 units.

"Individuals form about 65 percent of units involved in our trade," Sunanda said. "The trade will be hit by cheaper imports from China, Bangladesh and Indonesia."

There's a 5 percent GST on cotton, however the government raised tax rates on man-made fiber to 18 percent from 12 percent.

"While the medium-to-long run benefits of GST cannot be disputed, the short-run impact on growth is expected to be negative as compliance, confusion and inventory effects take a toll," said Abhishek Gupta, India economist at Bloomberg Intelligence. "However, recorded GDP growth is still likely to show an increase as part of the shadow economy shifts to the formal sector."