Touted as the biggest tax reform since Independence, the GST bill is India’s solution towards stimulating the economy of the country by changing and transforming the existing indirect tax reforms into one universal tax. This would uniform the ease of doing business in the country by enabling a free flow of goods and services from one place to another and also eliminate the cascading effect of multiple indirect taxations.
Previously we spoke about GST in general and how it would affect your startup, today we do an in-depth analysis of the GST’s impact on the economy and the various sectors of the country.
The Impact of GST on the Indian Economy
The biggest advantage of the Goods and Services Tax is the unification of India’s economy. GST paves the way for ending the long-standing confusion and distortions as a result of the differential treatment that exists for the manufacturing and the services sectors. GST is expected to uniform and align the local, interstate, intrastate and central taxes and hence transform the country into a common market with enhanced productivity and efficiency.
“GST could boost India’s GDP growth by 0.9-1.7 percent.” – National Council of Applied Economic Research
Here’s how the GST would impact the Indian Economy –
1) Foreign Direct Investments: The complications of multiple taxations at present pose a hindrance to the free flow of FDI’s within the country and as a result, some companies shy away from investing. This scenario will change after GST is implemented.
2) Foreign Exchange: So far the Indian currency is yet to see a boost due to GST. But after it’s implemented, it is believed that GST will lead to a wider flow of foreign direct investments and narrowing of current account deficits which would, in turn, help the Indian rupee perform better than other Asian and emerging market currencies.
3) Revenue: It is being predicted that India could get revenue of $15 billion per annum by implementing the Goods and Services Tax as it would boost overall growth, promote exports and enhance employment.
4) Single Point Taxation and Compliance: GST would pave way for a uniformed taxation law that would provide a single point taxation for the goods and services supply within the country. This would further simplify the tax compliance and assessment processes between different states of the country.
5) Credit to Manufactures: Under the GST regime, credits for all taxes paid earlier in the goods and services chain will be provided to the manufacturers, hence, incentivizing firms to source inputs from other registered dealers. This would result in additional bringing of revenues to the government through the unorganized sector. This unorganized sector that is not part of the value chain, would further be drawn into the tax net.
6) Credit to Dealers: To claim input tax credit (ITC), each dealer has an incentive to request documentation from the dealer behind him in the value-added/tax chain. Thus, the new tax regime is seen as more self-policing, less intrusive and hence more effective way of reducing corruption.
7) Clean–up India: The clean-up of the Indian taxation system will reduce the number of excise duty exemptions. According to the government’s estimates, excise tax exemptions results in foregone revenues of Rs. 1.8 lakh crore. The comparable figure for the states is about Rs. 1.5 lakh crore. Together, India loses about 2.7 percent of GDP because of exemptions.
Impact of GST on the various sectors of the country
It’s a difficult and an arduous task to measure the exact impact of GST across sectors as the exact rates are yet to be decided by the government. Depending on the present tax rates ( VAT and central excise) and the proposed GST rates, the general opinion is positive with regards to GST’s impact on the various sectors.
1) Services sector – The service tax rates might increase from the present rate of 15% after GST comes into effect. This will have a negative impact in terms of demand for those companies who are in the services sector like aviation, insurance, telecom etc.
Telecom companies could marginally see a negative impact due to high service tax rate of 18 % (expected) versus 15% rate at present.
2) Automobile sector – Some automobile companies might profit from the GST implementation if the GST rate is 18 % on their products depending on the condition that they’re able to retain the same benefits as that of lower rates.
However, a higher GST rate of 28 % could have a negative impact as compared to the expectations.
3) Sectors related to long value chain – Sectors like FMCG, consumer durables, pharma that have widespread operations in multiple states of the country could benefit from GST. With the need for multiple sales depots being eliminated, the fast-moving consumer goods companies can generate a considerate amount of savings in the distribution and the logistics department. These companies are currently taxed at a rate of 24-25% including entry tax, VAT and excise duty. A reduction in the rates up till 18% would result in a significant reduction in the overall taxation.
At the end of the day, the macro benefits of the GST implementation surpass those of the negatives. GST would help the country to take an ambitious leap ahead in the indirect tax reform and provide a uniform path towards economic progression and advancement.
Stay tuned to our blogs at Integra Books for more updates on the impact of GST and it’s implementation.