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Letters from India: How Bad Can the Crackdown on Cash and Tax Evasion Get? What’s Next?

Courtesy of Mish.

Reader “IB” an India businessman, writes about the crackdown on cash and tax evasion by Prime Minister Narendra Modi.

“IB” is very concerned about recent events, as well he should be.

Background for this story started on November 8, 2016, when Modi stunned the country with an announcement that 500-rupee ($7.30) and 1,000-rupee notes, which account for more than 85 percent of the money supply, would cease to be legal tender immediately. For details, please see Cash Chaos in India, 86% of Money in Circulation Withdrawn; Cash Still King in Japan.

The crackdown on cash has hurt the poor the most, and likely the richest the least. Nonetheless, Modi has widespread popular support.

Modi’s latest set of mandates has small businessmen caught in the crossfire. Let’s tune into to an email from “IB” (India Businessman) for some details.

Hi Mish,

I am writing from Mumbai, India. I have been running a small business for a decade now. Since the business has been profitable we have also been paying tax as applicable. But with the introduction of Goods and Services Tax (GST) in India from July 1, 2017, it looks like business might start experiencing difficulties soon due to its plethora of rules, some of which are mind-bogglingly inane.

More than the tax rates, it is the implementation and the draconian measures that have been taken by the Government that has made me come to this conclusion. Given that the incumbent government has been winning elections despite steps like demonetization and the opposition is in complete disarray (Modi is a great orator), they have been emboldened to introduce measures that would be viewed as draconian by normal standards. In this context, I have to mention Modi has been able to mesmerize voters to an extent that he can make even pain appear as something that is pleasurable and he has been able to conquer state after state and has an invincible aura about him now. Such acts always bring Goebbels to my mind.

I am attaching an article that highlights three steps (of the many) that have been introduced in GST that I feel would impact businesses negatively.

Thanks for your time.

Regards,


IB

New Rules

“IB” emailed a lengthy document describing new rules. What follows is a short list of three key points that I condensed from the document.

  1. The government will not allow Input Tax Credit on GST paid to vendors if the vendors do not pay their own taxes. The issue here is the Modi is forcing the role of tax-enforcement on businesses who buy goods for resale.
  2. Tax payments are required every month. For all cash businesses, there is no problem. There is a huge problem for those who have to pay taxes on receivables, in advance, when the business owners might not even get paid. Liquidity will kill many small businesses.
  3. Modi now wants three tax filings every month plus an annual tax return making it 37 overall. Currently, businesses file service tax returns twice in a year while they pay their taxes every quarter. Now with GST, small businesses have to file 3 returns every month, month on month, year on year, with fines stipulated for non-compliance.

All Hail Modi


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