Modi's crackdown on cash imperils pivotal gst

Modi's crackdown on cash imperils pivotal GST

Breaking News - Prime Minister Narendra Modi's crackdown on the casheconomy has shattered the consensus needed for a new national sales tax, plunging his boldest reform into limbo and threatening to entrench an economic slowdown.

Modi's government already had its work cut out to finalise a deal with India's 29 federal states to launch a Goods and Services Tax (GST) on April 1 that would transform Asia's third largest economy into a single Share market for the first time.

But his decision to scrap 86 percent of the cash in circulation, in a bid to purge the economy of illicit "black money", has caused huge disruption.

A slump in business activity stemming from the cashcrunch has caused the revenue of state governments, which collect value-added tax on goods and other duties, to slump by 25-40 percent.

The GST is India's biggest tax overhaul since independence in 1947. It would replace a plethora of federal and state levies with one tax, easing compliance, broadening the revenue base and boosting productivity.

It took Modi more than two years to forge a political compromise on the tax in August.

Now, demonetisation "has created a trust deficit," said Kerala Finance Minister T.M. Thomas Isaac. "After this, I am not going to sit and compromise. They don't deserve it."

LEFT IN THE LURCH Failure to break the deadlock could tip India into a fiscal crisis: The GST would need to come into effect by mid-September, when the old system of indirect taxation is due to lapse.

The lingering uncertainty is worrying companies needing to understand financial implications of the new tax.

"With so many vital details still missing, they are feeling left in the lurch," said Saloni Roy, a senior director at Deloitte.

Modi's shock move last month to scrap 500 and 1,000 rupee notes was aimed at India's shadow economy. But the ensuing cash crunch has caused job losses, disrupted supply chains and slowed construction activity.

With cash shortages showing no signs of abating, some economists are calling for emergency stimulus to cushion the economy against the impact of demonetisation.

COUNTING COSTS The quibble is not just over lost revenue. Some states worry about the social and political costs of demonetisation.

Take Kerala, where credit cooperatives that farmers and retired government workers rely on cannot swap old bills or issue fresh notes. The state alleges this has encouraged commercial banks to scout for their deposits, sparking a "run" on them.

Odhisa's chief minister has written to Modi, saying curbs imposed on primary agriculture societies were making it difficult for farmers to access crop loans and procurement payments.

With the states smarting, they have hardened their stance on how to collect the new GST, which will have federal and state elements.

They want sole control over businesses with annual turnover of 15 million rupees ($220,000) and so-called "dual control" over bigger firms. Jaitley opposes this, fearing tax collectors could end up at cross purposes.

Article By :- Business Standard.