Impact of GST On The Indian Economy

The Goods and Services Tax (GST) has the potential to transform businesses and bring in enormous efficiencies – tax and operational. The focus today, unfortunately, is too much on the rate harmonization. Rather, the focus should be on tax administration harmonization. EU GST is ‎an example, where different nation states have different rates, while having similar tax admin structure leading to lower compliance costs.

The Chief Economic Advisor (CEA) panel has recommended a Revenue Neutral Rate of 15-15.5%. It also proposes a 3-rate structure with a low, standard and high rate.
• Standard rate(17-18%) – on most items
• Low rate (12%) – on essential items
• High rate of 40% – on cigarettes, aerated drinks, pan masala, luxury cars
• And tax on precious metals – 2-6%

The panel has also proposed that –
• The GST rate should not be put in the constitution
• The 1% additional levy on inter-state trade be removed
• Alcohol and petroleum should be included under the GST
• Limit exemptions to as few as possible – to widen tax base

While these recommendations do carry weight to the extent that state govt. representatives were also consulted in the exercise, the final GST model will be the prerogative of the GST Council. Further, the details of the CEA panel’s recommendations itself are not known as we await the submitted report being made public. However let’s look at the impact of GST via streams of causation:

The impact of GST on corporates flows broadly from the following three streams:

1. Organized and unorganized price-competitiveness differential:As GST aims to widen the tax net, organized players in sectors with a large unorganized part are likely to benefit more. The price competitiveness of the unorganized entities is likely to deteriorate, resulting in narrowing of the price differentials. This is likely to lead to accelerated topline growth and also increase in market share of the organized guys. We got this feedback during our interactions with distributors and dealer-check during The Great India Roadtrips to several states in India.





2. Tax rate differential between now and GST regime:While this may not have much impact for businesses in the same segment or sub-segment, as all changes in tax rate would be valid for all operating companies, there may be significant churning in consumer choices across sub-segments. For example, a sharp increase in carbonated drinks may lead to substitution by demand for packaged juice. Similar changes may happen in the automobile segment, although the tax treatment of various segments are not yet clear.





3. Improvement in operational efficiency due to improvement in supply chain:As per a World Bank report in October 2014, costs of logistics, a key component of soft infrastructure, are relatively high in India. The cost of logistics ranges from over 10 % of net sales for auto components to over 14 % for electronics. These costs put Indian manufacturing firms in a position of major competitive disadvantage versus Indian companies in the service sector and competitors abroad, where the best-practice benchmarks for logistics costs are around 3 % of net sales for auto components and around 4 % for consumer durables.



It may be noted that most transportation in India is by truck, but “hard” road infrastructure is just one of many constraints for shipping goods. Regulatory impediments increase truck travel time by a quarter. Over 650 checkpoints slow freight traffic at state borders. The regulatory difficulties in crossing state borders have as much of an impact on freight performance as the quality of long-distance roads. Unpredictable variations in shipment times affect firms just as much as lengthy transit.

Implementation of the GSTis the most crucial reform that could address today’s logistics challenges. The transformational impact of the GST could be enhanced by a systematic dismantling of inter-state check-posts. The potential gains of more efficient and reliable supply chains are enormous. As per the World Bank report, simply halving the delays due to road blocks, tolls and other stoppages could cut freight times by some approx. 30 %, and logistics costs by even more, as much as 40 %. This would be tantamount to a gain in competitiveness of some 3-4 % of net sales for key manufacturing sectors.

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