With the much awaited Goods and Sales Tax (GST) regime fast becoming a certainty, the debate over its short and long term impact for India and its economy is getting sharper by the day. As the country prepares to embrace GST in 2017, a widespread speculation on its implications is further clouding the prevailing debate over the reformist legislation.
Will it or will it not aid growth? How would it benefit the economy as a whole and will these benefits percolate down to all the key sectors?
These are moot questions, which continue to be discussed and brainstormed by economic pundits not only nationally but also globally, as the likely implementation of GST draws closer.
Putting things in perspective
To see things in perspective, it is important to first understand the rationale behind this reformist legislation. The whole idea of bringing in GST is to streamline & simplify indirect taxation across value chain and to curtail all kinds of tax evasions – indirect and direct, which have for long been the bane of the Indian economy.
As one of the biggest structural reforms in the economy in recent years, GST has been envisaged as the much-needed tool to change the way businesses in India operate, by simplifying and streamlining the processes and systems, and by structuring them in line with the contemporary business needs. Global credit ratings, including S&P, have already given GST, which was introduced in the LokSabha in 2014 as The Constitution (122nd Amendment) Bill, the thumbs up as a vital policy initiative designed to give a boost to India’s growth prospects.
How it will work
From an operational viewpoint, GST will act to remove the multiplicity of taxes in various stages of production and business, thereby enhancing system efficiencies. From setting up warehouses to transportation of goods and services between states, GST will help eliminate the cascading impact of taxes, thus enabling better synergies and harmonization of production activities across geographies and sectors.
The impact of GST on economy would be dictated by the resultant capital deepening. Since GST would be mandatory for states, the effect would be much more sweeping than VAT, which is optional for states to implement. However, the current exclusions in GST will work to keep more than a quarter of the current tax base outside the new law’s ambit, thereby dampening the positivity to some extent.
The cause and the effect
There is nothing better than the casualty law of classical Physics to explain the nuances of GST, and how it will affect economy and business in India. Various conditionalities will influence the eventual impact of the proposed law, beginning with how low or high the GST rate would be.
Though it’s somewhat early to ascertain the exact rate, it’s not too early to realize that a lower GST would favour the growth of the Indian economy, as against a higher rate. A rate of around 18% or so would be ideal for economic growth as it would not trigger inflation, thus augmenting GDP growth by 1.5-2% within just one or two quarters of GST implementation. If the rate goes up to 22%, then there could be big trouble on the economic horizon, which the government would do well to strive to avoid.
The increase in profitability for businesses resulting from GSTis further likely to boost sentiment, encouraging states to become more amenable to the inclusion under GST of the products that are currently excluded. The possible inclusion of such products, particularly petroleum products, will pave the way for higher tax revenue earnings by the states. Other products that could eventually find their way into the GST net are electricity, alcohol and real estate.
Impact on the unorganized sector
The unorganized sector continues to be wary of GST implementation on account of its perceived negative impact. The stark reality, however, is quite in contrast, as improved efficiencies cannot but boost the overall economic activity in the country. The enhanced economic sentiment will eventually lead to employment generation at a national level, thus creating more avenues for growth for the unorganized sector too.
Benefits of GST
Holistically speaking, the overhaul of the indirect tax regime as a result of GST implementation is expected to not only rationalize the tax structure but also bring about improved order and coherence in the system.
Apart from shifting trade from the unorganized segment to the organized sector, GST will serve to ensure higher transparency and stability in the tax regime on account of a series of factors. These include simplification of the tax structure, along with removal of tax rate multiplicity and tax cascading, integration of state economies into a single broad-based tax regime, as well as greater compliance leading to better tax revenue collections for the government.
Competitiveness of the domestic production and manufacturing industry is also expected to go up, with exports likely to witness a big boost in the wake of GST implementation.
By enabling seamless availability of input credit across the value chain, GST is bound to help make the process chain more seamless and impactful for businesses engaged in goods and services.However, the impact is not likely to be uniformly beneficial. The consumer sector, along with retail, entertainment and hospitality, automobile, logistics and light electricals, are expected to be among the major beneficiaries of GST.But certain segments are likely to witness a downtrend, at least in the short run. Among these are some media and automobile companies as well as the FMCG sector. Oil & Gas is another sector that may be at the receiving end of the move to implement GST since it has been excluded from the purview of the legislation.
In the long run, however, as the new tax regime begins to stabilize and exclusions are also gradually brought into the GST ambit, the negative impact is expected to narrow down to much more manageable levels, and perhaps even be eliminated altogether.
Impact on various sectors
The sectoral impact of GST is expected to be nothing less than sweeping, with almost important segments of the Indian economy set to witness significant affirmative changes following its implementation. By enabling seamless availability of input credit across the value chain, GST is bound to help make the process chain more seamless and impactful for businesses engaged in goods and services. However, the impact is not likely to be uniformly beneficial. The consumer sector, along with retail, entertainment and hospitality, automobile, logistics and light electricals, are expected to be among the major beneficiaries of GST.
But certain segments are likely to witness a downtrend, at least in the short run. Among these are some media and automobile companies as well as the FMCG sector. Oil & Gas is another sector that may be at the receiving end of the move to implement GST since it has been excluded from the purview of the legislation.
In the long run, however, as the new tax regime begins to stabilize and exclusions are also gradually brought into the GST ambit, the negative impact is expected to narrow down to much more manageable levels, and perhaps even be eliminated altogether.
Manufacturing and retail sector
The manufacturing and retail industry will probably be the biggest beneficiary of GST, which will have an empowering effect on the health of this sector. While elimination of entry tax and the consequent compliances is an obvious impact of GST, this sector will also see full tax credit on inter-state sale, leadng to reduction in the cost of procurement or production. The cost of procurement is further expected to go down as a result of disallowance on stock transfer of goods. Imports will become cheaper for retailers as a result of credit of import duties. Taxation of stock transfers and job work transactions will further give a leg-up to business as a result of its direct impact on production outlay.
Infrastructure & Real Estate
One really positive thing about GST in the context of Infrastructure and Real Estate is that SEZ benefits will continue under the new regime. However, stamp duty may continue to apply, taking some of the joy away from the awaited change. But final clarity on the issue is awaited. Total tax incidence will also increase on products like cement and steel, though, on the positive side, the levy and valuation for composite transactions will get simplified.
Entertainment & Hospitality
India’s entertainment and hospitality sector has for long suffered from the cascading effect of multiple taxes, preventing the industry from realizing the true potential of its growth prospects. Though the industry has emerged as a key driver of the country’s growth, it continues to reel under taxation pressure, which the GST will prove instrumental in alleviating. With credit to be allowed between goods and services under the GST regime, profitability of companies operating in this sector is expected to go up. Concurrently, costs will go down, as will litigation challenges, on account of the simplification of levy on composite transactions, which will also gain in valuation.
Banking, Financial Services & Insurance
Better credits across goods and services is the key advantage likely to emanate from the GST regime, which will also lead to an increase in credit pool because of availability of GST credits on purchase of goods. On the flip side, interest on loans is likely to be taxed.
IT &Communication
This is one sector that has proved to be a real game-changer for the Indian economy in recent years. Unfortunately, the existing tax regime has been detrimental to the industry in many ways, not the least of them being classification disputes relating to SIM cards, AMCs, software and franchisee fees. As with other major sectors, elimination of the existing multiple taxes (service tax, VAT, entry tax) will make composite transactions much more simple, with higher valuations propelling growth. However, consumers may find themselves at the receiving end of higher call charges if the GST tax rate increases beyond 15%.
Healthcare
A human critical sector like Healthcare requires the best possible streamlining of the goods and services involved in the health chain. Anything that breaks the chain, such as litigations and cascading effect of taxes, can have a highly negative influence on the industry. GST is expected to bring a lot of order into the sector on account of a series of factors. These include credit on all types of GST and abolition of all other indirect taxes.
Automobile
Another prominent sector expected to witness major changes in the wake of the GST implementation is Automobile, which may see on-road price of vehicles declining by as much as 8%. However, in the midterm, the GST tax regime may adversely affect demand for commercial vehicles.
In conclusion, one can say that eventually, the impact on any sector will be dictated by how GST affects taxes in that sector. While some sectors are likely to gain through lowering of taxes, others could be hit adversely as taxes increase from the current levels. On the whole, however, the positives seem to outweigh the negatives, which probably explain why a consensus did finally emerge among the major parties on the need to bring in GST for improved economic growth in India. The analyses available on the issue are largely speculative in nature, since the final contours of the law are yet to be shaped. One thing, however, does seem clear. Tax buoyancy is definitely on the cards following the implementation of GST, with its focus on single market integration.
