While analysts and industry captains are not ruling out initial hiccups while moving towards the ‘One nation, one market’ concept under the Goods and Services Tax (GST) regime, Indian industry is set to benefit from the new tax system in a big way over the years.
India Inc. is expecting efficient allocation of resources, fewer supply disruptions, a check on inflation, tax buoyancy and improvement in compliance, leading to an increase of up to two percentage points in the economic growth a year after GST is operational.
The manufacturing sector in particular is expected to be a big beneficiary of GST as the economic system becomes more competitive. As GST will be aligned with an information technology platform, the tax payment system would also be streamlined. It’s going to be a tough task to roll out the GST but the new tax system is expected to become a standardized, workable format after some fine-tuning and alignments across the states, industry circles said.
As Confederation of Indian Industry President Naushad Forbes said, the supply chain would become faster, seamless and more efficient by allowing for uninterrupted movement of goods across the country. CII anticipates that implementation of GST from April 1, 2017 would reduce transaction costs and boost GDP by 1.5–2 percentage points. Once implemented, GST will subsume all of the country’s central and state level duties and taxes, thus making the country a national market and contribute significantly to the growth of the economy. As 50 per cent of the states will have to okay the bill, Indian companies will get enough time to get ready for the GST.
Take the fast-moving consumer goods (FMCG) segment, as an example. The implementation of GST will bring in a lot of positives for the FMCG sector as the effective tax rate will be reduced by 200-500 basis points. This augurs well for big guns in the segment like ITC, Hindustan Unilever and Godrej.
A major factor is that the GST will help the industry in optimising warehousing and inventory carrying costs.
The GST will eliminate a lot of inter-state taxes, the current bane of India Inc. This would have a positive impact on companies like Container Corp of India and Adani SEZ. A positive for the logistics will have a rolling effect on the consumer durables industry as they will be hugely benefited by the reduced logistical spending.
GST will turn out to be positive trend for companies like Voltas and Havells. “We believe that GST is a welcome move as it will not just help in removing economic distortions but will also build transparency. The consumer will be the beneficiary as it will help drive consumption and simultaneously fuel growth for the consumer durables sector,” said Sunil D’Souza, Managing Director, Whirlpool of India.
GST will lead to a realignment of warehousing and supply chain requirements of companies. This should lead to increased demand for inland container depots (ICDs), container freight stations (CFSs), multi modal logistics parks and container trains. While the service tax burden will increase, the industry should be able to pass it on to trade without impacting their margins.
The rapidly-expanding retail segment is another big beneficiary. GST would turn out to be a panacea to myriad tax issues plaguing the retail sector. “Importantly, GST aims to do away with the cascading effect of multiple indirect tax levies and provides for seamless flow of credits, both of which are expected to significantly and positively impact the retail sector. Additionally, with goods expected to be taxed at 18 per cent, the prices of most categories of goods is expected to come down,” said Mahesh Jaising, Partner, BMR & Associates LLP.
Various manufacturing sectors like cement and automobiles will benefit from GST, industry spokespersons said. This is primarily because of the removal of cascading effect of tax on the cost of goods and services that is expected with GST. Currently, most of car manufactures are located in few of the states in India. When they sell cars to other states, they charge two per cent CST, which is currently included in the cost of car as it is not creditable. However, in GST regime, credit will be available.
“Currently, the MRP based payment of excise is applicable on accessories leading to higher landed cost. In the GST regime, it will go away. The other aspect is an easy credit mechanism so that all taxes on inputs are set off against the output liability of GST. Input may be capital goods or input service, credit of all is available for set off,” said AK Rastogi, GM Finance, Nippon Audiotronix.
How can India Inc make the switch-over to GST smooth? Since all indirect taxes will be subsumed, companies would need to bring in significant change in processes, training teams and developing IT systems for being GST compliant. Organizations will have to upgrade their technology infrastructure, as most of the processes are automated in the GST regimes in respect of tax credit, redesigning of invoices and other procedural aspects. “The structural transformation of GST in the long term will be enormous and as such the passage of the bill is very welcome. In our bank we are fully geared to meet the implementation challenges and necessary IT support for it will be in place in due time,” said Arundhati Bhattacharya, Chairman, SBI.
It’s going to be a win-win situation for all. As Chanda Kochhar, MD & CEO, ICICI Bank, said, consumers will see lower prices in the medium term, businesses will able to operate more efficiently and the government will see a broadening of its tax base along with ease of tax collection. Rana Kapoor, MD & CEO, Yes Bank, put it very succinctly: “Implementation of GST in one sweep is reinforcing conviction in ‘Believe in India’.”