India: The Lunatics Have Taken Over the Asylum

by Pater Tenebrarum, Acting Man: Goods and Services Tax, and Gold (Part XV)

Below is a scene from anti-GST protests by traders in the Indian city of Surat. On 1st July 2017, India changed the way it imposes indirect taxes. As a result, there has been massive chaos around the country. Many businesses are closed for they don’t know what taxes apply to them, or how to do the paperwork. Factories are shut, and businesses are protesting.

Increases in administrative costs have made economics of trading and manufacturing unfavorable for many. Most lack access to accounting and IT skills to implement the new system — India simply does not have that many skilled people. As many as half of all transportation trucks are not operating. The media have “decided” not to cover the demonstrations.

The new indirect tax is a value-added tax, but as can be expected from the Indian government, it is chaotic, bureaucratic, extremely complicated, and full of loopholes. If you pay GST to your supplier but if he fails to deposit it, you cannot claim it as an input tax, making a businessman not only a collector of tax but an enforcer — this kind of draconian VAT system likely does not exist anywhere else.

There are about 40 tax returns required each year for each province that a company operates in. While tax officers don’t know how the new system should work, failure to comply will lead to imprisonment.

A case of unforeseen complexities. Note: generally only four different levels of GST are advertised, but there are actually special rates for precious stones, gold and sugary drinks, so there are seven rates in total. [PT]

There are about seven kinds of rates. Not only do the rates differ based on types of products, but also based on the prices of products. For example, there is a 5% sales tax on footwear if it is priced at less than INR 500, but 18% if it is priced higher. So if the total price is around INR 1,000, footwear stores are selling a pair of footwear as two separate pieces, pricing each piece lower than INR 500. This way they can charge only 5% tax, instead of 18%.

One must ask if the Indian government gave any thought to what would happen if for some reason the price of something like this went up from INR 499 to INR 501. A mere 0.4% change in price would result in the customer paying about 13% more.

Imagine the shock a transition of price like this would cause to the demand and supply situation. But, really, Indian bureaucrats never contemplate on such issues. Every regulation is made is to maximize their collection of bribes, or these days to increase tyranny. As Dr. Madhusudan Raj, President of Mises India says:

“[Indian Prime Minister Narendra Modi] just says what he wants to. Indians are in trance and those who are critical are demonized. It is all a huge make-believe world right now. Big Matrix.”

Let’s consider the situation with gold, where the total tax hasn’t changed much, to get a feel for what doing business is like. The total indirect tax (import duty plus GST) on gold is now about 14%, instead of 13% previously. The customer also needs to pay for the cost of import and insurance, the mark-up for the importer, and the mark-up for the retailer. At the very least these costs add about 6% to the landed price.

The final retail price of gold should be around 120% of the international price. Interestingly, you can buy gold for 110% of the international price, and even lower if you buy in bulk. Depending on how efficiently you ran your gold business, you would lose at least 5%-10% on revenue.

As a corollary, absolutely the only way to run gold trading or any other business in India is by avoiding payment of taxes, by cheating suppliers and clients, and by externalizing costs. None of these pinch the conscience of Indians. One cannot just blame the system, for the culture feeds it.

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