Little India struggles with tax revolution

India has vowed that a new nationwide tax will transform the economy by bringing more businesses into the digital system and filling state coffers, but for shopkeeper Sanjay Kumar Rai, who has never used a computer, the transition is terrifying.

Rai is one of hundreds of thousands of small traders fearful of the goods and services tax (GST) launched Saturday (1) that aims to create a single market in place of a labyrinthine system of more than a dozen national and state levies.

Under the new regime, businesses must register with the GST network and file invoices and tax returns online at least once a month.

Prime minister Narendra Modi has compared the changes to getting used to a new pair of eye glasses. Ministers say there will be teething troubles but India's army of small business owners like Rai are in a digital panic.

At his shoebox-sized stationery store in central Delhi, Rai carefully notes down all sales in a traditional thick ledger book in Hindi. He has no laptop and says he would not know how to use one if it was placed in front of him.

"I'm uneducated," he said. "I don't know English. I only know Hindi so how do I navigate this new system?" Till now he has made all tax returns on paper.

In theory, traders like Rai with annual revenues of less than two million rupees ($31,000) do not need to register on the GST network.

However, the bigger clients which buy paper and pens from him want suppliers to be in the GST system or they will go elsewhere. The government is pressing for proof of all sales, regardless of size, so that it can go after tax cheats.

Analysts say the GST has been set up to force compliance in a country with a poor tax base and a reputation for avoidance.

"It's a very clever system design," Credit Suisse managing director Neelkanth Mishra said.

"There will be an automatic compliance upstream because it's up to the companies to ensure that all their suppliers are GST compliant."

In Rai's case, an accountant client came to his rescue and completed his online registration. But the shopkeeper is still not confident about filing monthly returns under the new system.

"They take out a new law and then we small people have to find a way to fit in it," he said.

He is not the only one worried about the massive changes rippling through India's economy.

Thousands of traders across the country closed their shutters on the day before the launch to protest against the tax.

Vijay Prakash Jain, secretary general of the Bhartiya Udyog Vyapar Mandal, a national traders association, was among those supporting the strike.

"The rules and regulations are complicated and hard-hitting and we, especially small businesses, can never comply," he said.

"Earlier we filed returns once a quarter but now we have to file three returns a month and that's 37 in a year," he said.

"Plus the government wants everything done online. Less than two percent of the country's 60 million traders may have computers. Where is a small trader going to get a computer from?"

Bhartiya Udyog Vyapar Mandal has asked the government to reduce the filings to once a quarter and to let businesses file manually. Ruling BJP party chief Amit Shah said this weekend that changes could be made to the tax law.

Ratings agency ICRA said the transition would reduce the competitiveness of the informal sector in favour of organised business.

"Nevertheless, higher compliance is expected to boost the tax base and the revenues of the central and state governments over the medium term," it said.

Moody's Investors Service also said in a report that GST would boost productivity, economic growth and government revenues.