India will soon be in the midst of its most significant tax revolution since 1947. Here is a primer as to how the coming of this new structure will transform business as usual for Indian companies and foreign firms.
A small car helped French carmaker Renault make a big impact in India. Compact hatchback Kwid became a runaway success as soon as it launched in late 2015 and helped establish Renault as one of the fastest growing automotive brands in the country. The Kwid is a result of design innovation and frugal engineering, with 97% of its parts sourced locally and supplied by 400-odd Indian vendors. But this Make in India story is a complicated one because each original component shipped to the Renault-Nissan plant in the South Indian state of Tamilnadu (TN) attracts an entry tax depending on the state it originates from. For instance, all head lamps, tail lamps, switches and horns for the Kwid are manufactured and supplied by UNO Minda located in Haryana state; TN, therefore, treats these goods as an import and levies a tax on them. Renault bears this cost paid by the component maker to TN. When the final product, the Kwid, is ready to rollout, it is taxed another time at the factory gate by the Central Government. When a consumer purchases the Kwid from a showroom in another state, say Goa, TN treats the finished good as an export and levies a Central Sales Tax on it. Sounds complicated, doesn’t it? But all this is set to change when the Goods and Services Tax or GST comes into force on 1 July 2017. India’s biggest tax reform, GST will replace most indirect taxes with one tax and make it easier to do business in the country. GST will subsume a host of taxes like excise duty, countervailing duty, service tax, state levies like octroi and entry tax, value added tax and luxury tax – and simplify India’s tax framework as a whole.
A small car helped French carmaker Renault make a big impact in India. Compact hatchback Kwid became a runaway success as soon as it launched in late 2015 and helped establish Renault as one of the fastest growing automotive brands in the country. The Kwid is a result of design innovation and frugal engineering, with 97% of its parts sourced locally and supplied by 400-odd Indian vendors. But this Make in India story is a complicated one because each original component shipped to the Renault-Nissan plant in the South Indian state of Tamilnadu (TN) attracts an entry tax depending on the state it originates from. For instance, all head lamps, tail lamps, switches and horns for the Kwid are manufactured and supplied by UNO Minda located in Haryana state; TN, therefore, treats these goods as an import and levies a tax on them. Renault bears this cost paid by the component maker to TN. When the final product, the Kwid, is ready to rollout, it is taxed another time at the factory gate by the Central Government. When a consumer purchases the Kwid from a showroom in another state, say Goa, TN treats the finished good as an export and levies a Central Sales Tax on it. Sounds complicated, doesn’t it? But all this is set to change when the Goods and Services Tax or GST comes into force on 1 July 2017. India’s biggest tax reform, GST will replace most indirect taxes with one tax and make it easier to do business in the country. GST will subsume a host of taxes like excise duty, countervailing duty, service tax, state levies like octroi and entry tax, value added tax and luxury tax – and simplify India’s tax framework as a whole.
Erasing Borders Within Borders
Thanks to GST, goods can move easily throughout the country’s 29 states and 7 Union territories essentially transforming India into a unified market. GST will have an immediate positive impact on transportation and logistics and help reduce operating costs across sectors. Industry observers believe that the time and costs associated with shipping goods across the country will fall by 50% because trucks will no longer have to wait for hours or days at state borders filling out paperwork and reconciling a cascading system of taxes. This will effectively help bring down the price of manufactured products, cement, steel, consumer durables and more, benefitting the end customer and boosting domestic consumption. Analysts foresee that GST will positively impact industry sectors related to manufacturing, pharma, FMCG, automobiles, technology, warehousing and logistics.
Less Paperwork = More Tax Revenue - Less Corruption
The International Monetary Fund reflects this positive sentiment and expects that the adoption of GST is likely to raise India's GDP growth rate to over 8%. An easier to follow regulatory system will also help widen the tax base, increase compliance and mean greater tax revenues for the Indian government. Not surprisingly, the passage of GST is highly anticipated by enforcement agencies, domestic players and foreign investors alike. Global firms who have so far shied away from investing in India due to its regulatory and bureaucratic tangles will be reassured to see that the Indian government has demonstrated the political consensus necessary to bring about such a significant change.
Apart from fostering efficiency and allowing for more competitive pricing of products and services, experts believe that the electronic processing of tax returns, refunds and payments through 'GSTNET' will help to reduce corruption and tax evasion. Built-checks on business transactions will make the tax framework much more transparent and reduce the scope for the generation of black money. This will go a long way in making India a more favourable destination for international players who are eager to tap into a market of 1.3 billion consumers.
Apart from fostering efficiency and allowing for more competitive pricing of products and services, experts believe that the electronic processing of tax returns, refunds and payments through 'GSTNET' will help to reduce corruption and tax evasion. Built-checks on business transactions will make the tax framework much more transparent and reduce the scope for the generation of black money. This will go a long way in making India a more favourable destination for international players who are eager to tap into a market of 1.3 billion consumers.
Business Opportunities in Post-GST India
Global players can take their pick from any number of emerging opportunities this post-GST landscape presents. For instance, the absence of adequate cold chain facilities in the country holds enormous promise for potential investors. Improving cold storage facilities, investing in technology and increasing the network of refrigerated trucks to deliver seafood, fruits, vegetables and dairy products in less time could help investors take advantage of India’s rapid urbanisation. Many big players are vying for a share of this action. Japan’s Nippon Express Co. is looking to invest in this sector; an affiliate of global private equity firm Warburg Pincus has agreed to invest $125 million in an Indian logistics company, and French logistics company FM logistic plans to invest EUR 50 Million in India over the next four years to improve its warehousing network across the country. Stephane Descarpentries, Director-Strategic Projects and Director, operations Asia, FM Logistic drew attention to the timing of this move by saying, “India is the biggest democracy worldwide, sporting an impressive growth rate - the GST adoption will be a turning point in the logistics market. We aim to contribute to a better efficiency of the logistics in India, especially in this post-GST scenario.”
Long-term and Short-term Implications
Industry experts across the board agree that GST will improve the ease of doing business in India and prove to be beneficial in the long run, however, it remains to be seen what this ambitious move means for the Indian economy in the short term. Some strategists expect GST to disrupt consumption and growth in the near future and have a one-time inflationary effect. A report by HSBC analyses these implications and predicts that “The near-term could be messy, with adjustment costs for the private sector grappling with inter-sector implications, and the central government trying to compensate states for revenue loss.”
Let's keep eyes on govt of India periodical GST roll-out schedule in July and September 2017.
No comments:
Post a Comment