GST Tax Reform Will Make the Manufacturing Industry More Competitive
In a major step towards unified tax system to stimulate the economic activity in India and contribute to the ease of doing business, Indian Parliament recently cleared a landmark tax reform bill, the Goods and Services Tax Bill or GST Bill that will pave the way for a new national sales tax and the creation of a common market across the country for the first time. Under the proposed GST, effective tax rate on goods (comprising around 70-75 per cent of the Consumer Price Index basket) will decline. “Once this GST is implemented it will bring basic changes as far as the Indian tax structure is concerned,” said Arun Jaitley, India’s Finance. “It will convert India into one unified market, with one unified tax. It will improve the tax base and make evasion very difficult.” Now, the bill has to be ratified by at least 15 or half of India’s 29 states within next 30 days.
India had a very burdensome tax system which makes its manufacturing sector very uncompetitive in both local and foreign markets. Currently a product manufactured in one state, transformed in another state and sold in a third state is taxed at a higher level than an imported product. A 2 per cent central sales tax is imposed on interstate shipments between two different parties. Trucks have to wait for hours or days at the tolls between states, where they often have to pay bribes, this has a heavy cost in terms of money and time, and the deliveries are often delayed because of that. To circumvent these hiccups, many manufacturing companies have adopted strategies such as having small factories or self-owned warehouses across different states. So that goods remain in their own company’s possession when moving from one state to another. However, maintaining these scattered warehouses or facilities add to the unnecessary operational costs.
Currently, manufactured goods in India are subject to excise duty, value-added taxes (VAT), and a central sales tax. At present, there is a compounded effect of tax on tax which makes the final consumer price of goods 25 per cent higher. Interestingly, it is cheaper and faster for a company in South India to buy from a supplier in China than from a supplier in North India.
Under the new tax reform, there will be just one simple GST. The rate for the new GST is not yet decided but it is likely to be lower than the current effective rate. This will result in reduced consumer prices of goods, making them more affordable and thus, increase in consumer demand.
Petroleum products, entertainment and amusement tax levied and collected by panchayat/municipality/district council, tax on liquor consumption, Stamp duty, customs duty, and tax on consumption and sale of electricity will not be covered under GST purview.
GST is believed to minimise the cascading effect of taxation, harmonise the tax base laws, simplify tax administration and compliance, and prevent unhealthy competition among states. From apparel to electronics, retail margins are expected to benefit from the GST, including rent offsets and further margin support stemming from a streamlining of operating structures GST will have positive impact across various sectors such as automobiles, banking and financial services, metal, telecom, pharma, textiles, cement, logistics, furnishing and home décor, automobiles, and consumer durables. There will be improved growth opportunities, increased overall demand, decreased costs for the logistics and supply chain inventory. The overall cost competitiveness specifically in furnishings and home decor products will be curbed.
In an interview with Forbes, Melissa C. Frakman, a senior director for Albright Stonebridge mentioned a big winner of the reform will be foreign direct investors, including multinationals and global private equity funds, who will benefit immensely from a more predictable, transparent, and consistent tax climate. She further added that this was particularly true for companies engaged in intrastate commerce such as logistics, manufacturing, and agriculture. Foreign single-brand retailers will be more than happy with this reform because this unifies taxes on manufacturing, packaging and distribution across state lines.
Indian government has targeted April 1, 2017 as the deadline for implementation of GST. However, this may be postponed due to expected political delays and the debate on implementation guidelines to reach a consensus.
GST is a significant step towards unifying the country’s 29 states and 1.3 billion people into a common market for the first time. Economists are confident that this will boost India’s annual economic output by 1-2% points. GST tax reform will hopefully pave the way in shaping the country’s economy.
Shailja Kaushik | Blogger - Arsha Consulting