India is currently going through major reforms in its overall economic sectors. The growth trajectory of India is so high that it is poised to become the third-largest economy of the world by 2030. Government is taking significant initiatives to boost the overall economic growth of the country. Introduction to FDI, GST, Make In India, Digital India, Skill India etc. are amongst the major development programs.
GST stands for Goods and Services Tax. It is considered as the biggest taxation reform in the history of Indian economy. It will subsume multiple taxes like VAT, Service Tax, CST, excise and additional excise duty, entertainment and luxury tax, etc. It is a single uniform taxation system which will help in eliminating time, cost and effort.
GST is introduced in the parliament as The Constitution Amendment Act 2016 and it is regulated by the Union Finance Ministry of India. It is a consumption based tax levied on the supply of goods and services which mean that it will be imposed at each stage of sale or purchase of goods or services based on the input tax credit method.
GST will transform Indian economy turning it into one common market based on a uniform taxation system. It will enhance the ease of doing business in India. Industries will make big savings in terms of logistics and supply chain due to GST. Some companies will benefit more as the GST rate will be lower than the current taxation. On the other hand, few sectors will have to pay more tax as GST will replace the old taxes uniformly, which may increase the rate respectively.
The overall impact of GST on India’s economy is expected to be positive. As GST will be implemented from July 2017, industries and business organizations have already started to create future strategies. Both the central as well as the state government are focusing on regulating GST and major changes are being made in the organized framework.
Government has joined hands with the National Securities Depository Limited (NSDL) and together they have created Goods and Services Tax Network (GSTN). It’s a non-government firm which will provide IT infrastructure services to the central and state governments, stakeholders and taxpayers for proper implementation and regulation of GST.
Indian economy is highly diverse due to a large number of industries operating in different sectors having different location, supply chain and target consumers. To understand the detailed impact of GST, let’s discuss its consequences on different industrial sectors.
- Information Technology
The IT sector of India has exponentially grown in the last decades influencing huge opportunities for jobs, investments and FDI as well. The current taxation system includes multiple levies in this sector which will be eliminated after GST’s implementation. It will enable deeper penetration of digital services.
IT companies have different centres and offices working together systematically to service a single contract. As GST is imposed, companies might need their each centre or branch to generate separate invoices to every contracting party.
Duty on manufactured technology goods will rise from current 14%-15% to 18% approximately. This means the cost of electronics like mobiles, laptops and computers will rise.
When goods are sold to other states, a Central State Tax (CST) is imposed along with entry tax and Octroi charges. GST will subsume all the excessive taxes and relieve the logistics sectors from the challenges that it faces currently.
Standardization in tax rates will result to effective utilization of warehousing and allied facilities. Vehicles carrying goods will not require going through documentation problems like challans, biltys, invoices of bills of sales and dispatches, etc. which will help to decrease the freight traffic and smoothening the supply chain.
Logistics hubs will be able to develop on the basis of connectivity rather than state boundaries due to tax parity. The chances of crossing over tax jurisdictions in the supply chain will become negligible as GST offers a tax-neutral environment.
Due to a tax-neutral environment, logistics for FMCG goods and products will require low expenditure and it will effectively benefit the companies under this sector to generate substantial savings. Currently, FMCG companies pay around 24% to 25% taxes including VAT, excise duty and entry tax. GST will reduce it to 17% to 19%.
The GST amendment includes a recommendation for levying 40% taxation on aerated beverages and tobacco products. If it is implemented, those products will become more expensive as their prices will increase by over 20%. While there are many companies who enjoy concessional rate of excise, the uniform GST may increase their effective tax subsuming the concession.
GST will influence the E-commerce market transforming it into a single unified market throughout India. It will allow free movement of goods in every part of the country. It will also bring efficiency in product costs by eliminating the cascading effect of taxes in customers.
On the other hand, the introduction to GST in e-commerce will result in increased workload in terms of documentation and administration as per the tax collection at source (TCS) guideline in the GST regime.
GST will eliminate the barriers between states and manufacturers will be able to pass on the benefits to their customers through cost reduction. Companies will make huge profits from consolidating their warehouses and efficiently managing inventory.
Telecom companies will witness more ease in doing business as GST will enable them to operate from the single entity as currently, they have set up multiple state-specific entities and transfer stocks to them. GST will bring cost-effectiveness in this sector as companies will no longer need to heavily invest into logistics for creating warehouses in each state.
On the other hand, call and data charges are expected to go up if the GST regime exceeds by 15%. Tower firms will not be able to set off their input duty liabilities if petroleum products are kept outside GST framework.
The automobile sector will make huge benefits in near future due to the introduction of GST. Apart from the advantages in logistics and supply chain, the on-road price of vehicles could drop by 8%. Lower prices will act as an indirect stimulus to boost volumes.
Demand for commercial vehicles may go low. GST will subsume the multiple taxation system levied on automobile companies which differ in several states of the country. Companies will need to re-enact their memorandum with states which will involve huge workload.
GST will bring the major changes and uniformity that media sector has never seen in this country. DTH service providers, film producers and multiplex owners are imposed with service taxes as well as entertainment taxes. GST will subsume all these multiple taxes providing ease of doing business in media sector. Taxes can go down by 2% to 4%.
Different states have levied high rate of entertainment taxes on multiplex chains. They will be relieved due to GST and save on revenues. It may result in low ticket prices and box-offices will get busier. GST acts as a big boon to the film studios and producers. Being the second largest tax payer in the Indian economy, the TV & film industries will be relieved from huge taxation due to GST.
Post-GST, financial institutions will not be having a favorable business environment, especially the insurance companies. Life, health and motor insurances will begin to cost more after the implementation of GST. The impact on insurance companies will be negative.
GST will replace the service tax that airlines companies pay to the government. This will result in increased air ticket rates, both domestic as well as international flights.
Service tax on air ticket fares currently range between 6% to 9%. After the implementation of GST, the rate will surpass to the range of 15% to 18%. It might not be a good sign for air travellers.
There are about 8 different taxes levied on the pharmaceutical companies in India, regulated by both states as well as central government. A uniform tax like GST will subsume the different taxes providing ease of doing business in the pharma sector. Supply chain efficiencies will result into cost reduction which is considered as the biggest positive impact of GST on this sector.
If the GST rate is pushed up to 12%, it will remain as a neutral tax for pharmaceutical sector but if it rises more than 12%, it will have an inflationary effect on drugs prices.
The cement industry needs a mention in this report as it is one of the major industries which are going to get boom due to the emergence of GST. The logistics and supply chain efficiency will result to huge benefits for cement transportation and exchange.
Currently, the taxation system for cement companies is at the rate of 25%. If GST rates are fixed around 18% to 20% then the overall taxation will reduce providing huge profits to the companies. Apart from the savings through transportation efficiency, GST will progressively boost the sales of cement products by promoting better infrastructure.
GST will surely boost the country’s economic growth and ease of doing business in overall sectors. While some companies will make huge profit, some of them may have to go through debacle. It will begin a new phase in India’s economy by providing logistics and supply chain efficiency that the country requires the most.