GST – The Harbinger of a New India

Goods & Services Tax or the GST is being hailed as India’s biggest ever tax reform. After hanging fire for over a decade since it was first mooted, the day when this tax reform will be rolled out seems near – a demand that Indian industry has been making for long.  Despite the several hurdles and the vast canvas of stakeholders to be aligned, finally, on June 2, 2017 all transition rules were cleared. Though no one is clear what the future holds, both industry and consumers have big expectations from GST. Since it subsumes both central and state taxes, it is expected to make industry more efficient and bring prices down.

But is GST only an indirect tax reform? Is it going to have a larger impact than just aligning the tax structures? Will it really make India more competitive, both nationally and internationally?

I believe that GST is far more than an indirect tax reform. It is a structural reform that will have far a reaching impact – from ease of doing business to dissolution of the parallel economy to enhanced exchequer collections, creation of livelihoods, and reduction of poverty – it is truly the dawn of a new era for India.

In a recent report the World Bank has hailed the GST as a major indirect tax reform that is being implemented without an adverse impact on the poor.  As per the report, the GST will help collate information on spending patterns, given that it will have a paper trail. While it is an indirect tax reform, its in built mechanisms will facilitate better enforcement of personal and corporate income taxes and curb generation of black money. Leaving little incentive for hiding incomes, it will encourage a less cash economy and an increasing preference for digital payments.

Since it is an indirect tax reform, let me first focus on how it will impact the current tax structures. Over the decades, Indian industry has been hit hard by a cascading taxation regime.  Multiplicity of taxes have created a very complex taxation system in India, impacting the ability of businesses to perform thus slowing down GDP growth.  India’s GST model will integrate the taxes on goods and services across the supply chain. With suppliers setting off GST payments on input purchases against those on supplies, the cascading effect of taxes is expected to be eliminated completely.  Even at higher rates under GST, the final tax liability on companies will be lowered.

What makes it more than a tax reform, however, is its enormous potential to improve ease of doing business, thereby improving India’s global image as a business destination.  As GST combines India into a single economic zone with a common tax structure, it will lead to economies of scale in production and create an efficient supply chain. A World Bank Report has stated that currently, due to interstate check posts, the transit time for goods is increased by about 60% leading to increased logistics costs by about 2 to 3 times. As these inefficiencies get eliminated, Indian goods are likely to become competitive at both, national and international levels, spurring the Make in India initiative in the right direction.

Additionally, clarity on basic customs duty and the net effect of GST will encourage international investors to fast track their decisions on manufacturing in India. Investments of upto Rs. 1,000 crores, from companies including Apple, have been held up as investors awaited clarity on Post GST price differentials.

A large number of manufacturing sectors are expected to experience a positive impact, given that duties on inputs have been reduced. for instance, the automotive sector, India’s leading manufacturing sector, is likely to see a reduced incidence of taxes and benefits of improved supply chains.  Impact on sectors such as FMCG, textiles and dairy products amongst others will push the retail sector up north. In the short term though, prices might escalate, pushing sales down. But with cascading effect of taxes eliminated, prices should eventually course correct, leading to a win-win for the consumer and the retail sector.

Since the Government has decided to follow the concept of exporting only value added on goods and not taxes, exports will be zero rated. All taxes paid on goods and services exported, as well as on inputs utilized in the process of supplying these, will be refunded to exporters. This will boost the country’s exports as well as the Balance of Payments position.

In my view, a positive multiplier effect across sectors, will surely give a fillip to India’s GDP.  But will these positive impacts be visible from day 1? Are there no challenges in the transition to the new regime? Are all stakeholders looking forward to the new regime?  An initiative of this magnitude is sure to bring with it a host of challenges.

The positive impact of GST will take at least a year to become visible.  The first quarter of this year has seen manufacturing activity slow down. Not keen to carry over stocks subjected to existing tax structures, companies have pared down inventories to a large extent. The next three quarters or may be a full year, will be a learning period for all stakeholders. The multi tier tax structure will increase the compliance complexities, at least to begin with.

As with any new regime, several stakeholders have apprehensions with the GST too.  With the Anti Profiteering Clause in place, a section of the industry is worried about unnecessary Government interference in pricing.  Exporters are worried about the advance taxes to be paid, which will lead to a large working capital funds being locked.  Small traders and even some manufacturers, for example, do not have full time accountants on their rolls. They might now need to hire full time accountants. Challenges of Government’s readiness to release refunds quickly, the industry’s capability to file a larger number of returns and the robustness of the IT backbone to manage the increased burden can not be denied.

While Indian Government expects the prices to fall, this is not the experience of several countries that have implemented GST in the past. Till date about 160 countries across the world have implemented GST and their experiences have been varied. While Singapore faced an inflationary trend, Malaysia controlled it through a price control mechanism. In Australia bottom 20% of the household paid an additional 4.4% of their income in taxes. Research has also revealed that the less rich countries such as Ethiopia and Vietnam have seen a beneficial impact of GST.

In India, it is difficult to say whether the new tax structures will lead to inflation or the prices will actually reduce. Though the Government has appealed to companies not to increase prices, the latter will wait and watch. As companies begin to make adjustments for the new taxes, input credits and increased cost of compliances, the impact on prices remains to be seen.

It is surely not going to be an easy journey. With a shortage of “GST experts” there are likely to be several implementation trials and challenges. The Government is taking steps to ensure that there are no surprises in store for the industry.  Yet, the industry would like to see the Government adopt a lenient view towards lapses, at least for the first few months. Addressing legal and operational issues that arise during the transition phase will also remain a challenge, given that there will be no precedence.

The solutions to these and many other challenges will emerge only as we traverse the journey. While there might be chaos to begin with, GST will surely be a game changer for India! Over time as GST makes a positive impact on consumption, production, tax revenue collection and inflation control, it will also help to boost Make in India, generate more jobs, spur GDP growth and reduce poverty. Undoubtedly, on July 1, 2017 the country will step into a new era, with a revolutionary tax reform, that will perhaps be the harbinger of a new India.







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