GST: The Good and The Scary (I)

The GST has occupied much of the discourse of the country over, from dinner tables to academia—just why are people losing sleep over something as boring as taxation?
Well, mostly because the GST is not just another reform; it can drastically (or better drama-tically?) change the course of this country’s economic and fiscal future.
The previous post discussed what the GST really means (A Simple Guide to the GST). This post discusses what the GST really means for India. The benefits laid out below will move from the more palpable ones to the subtle, yet more potent ones.

Restrictive bureaucracy, superfluous procedures and long delays are the unequivocal laments of this country. Apart from fulfilling the various deficiencies of the present system (discussed in detail in the last post), the GST will bring about uniformity, predictability and help smoothen processes. This will help India attract more economic activity, both domestically and through foreign investments; helping the Make In India cause.

For instance, due to a plurality of administrations, trucks carrying cargo have to stop at each state border to get the cargo papers inspected and stamped. This leads to long delays, sometimes of over 24 hours, at each border. Moreover, we have to contend with congestion on the highways, additional transportation costs and hence, costlier consumer prices. Since the rules for each state under the GST will be the same, there will be no need for lengthy checks at every state border.

Every manager wants to maximise the gain for his company. To this end, he strategises and acts, though always within the constraints of the laws of the land. In the current system, he has to constantly cut corners in the ideal strategy he conceives, to make it fit within the law. When decisions are carried out freely, solely on economic principles, they boost productivity, both for the company and the economy. The greatest impact of this will be felt in supply chain management. Some of these decisions can include the following:

  1. The relative state taxes will not be a deciding factor for a producer in setting up a new unit. He will only look at economic factors such as proximity to the market and raw materials, labour costs, geography etc.
  2. Most companies maintain warehouses in each state where they sell their goods. This is done to avoid paying the CST which cannot be set off. If I have a warehouse in Delhi and I sell to Mumbai, CST is chargeable. But if I maintain a warehouse in Mumbai as well, since I would be selling from Mumbai to Mumbai, I will pay VAT that can be set off. This leads to unnecessary costs associated with maintaining multiple warehouses. Instead, the GST will allow a set off of both CGST and SGST and I can set up one big warehouse in Delhi from where I can sell to all other states.
  3. Even procurement of inputs can be done from across the country without concerns of the CST. Think of a Delhi book seller purchasing books from an unfavourable distributor in Delhi versus purchasing from a more agreeable distributor in Haryana. The GST will allow him to opt for the latter.
  4. For retailers, rentals are one of the main components of total cost and service tax is levied on this. Since these retailers do not offer services or manufacture goods, they cannot set off this input service tax paid with output service tax or excise. Input service tax cannot be set off against VAT and therefore, the tax paid on these rentals cannot be set off. This will no longer be the case with the GST.
  5. Companies could now be able to freely transfer their inventories among their various branches without forfeiture of a part of the input tax credit. This can help companies in efficient inventory management to prevent simultaneous over-stocking and under-stocking at different branches. [Note: There is still a lack of clarity on the treatment of stock transfers under the GST. We would know if this point will actually stand, in a few weeks]

Readers of the Economist would remember the iconic sentence that began the article reflecting on Indian Politics a year after NDA’s 2014 victory. “India is a continent masquerading as a country” (How To Run A Continent). With states that are sometimes bigger than whole countries, by leaps in terms of population, and strides in terms of area, it has been no easy task for the hub to run the wheels with all its spokes together.

Modi, who was often feared to be someone with a dictatorial outlook before the elections, has turned that accusation over its head with his focus on cooperative federalism. The term implies cordial relations between the Centre and States to ‘chart a common course to progress and prosperity’. The shift from the Planning Commission to the NITI Aayog was one, the greater devolution of the Centre’s funds to the States was second, and the GST Council can be the third step towards achieving this broad goal.

The GST council will decide on the tax rate, exempted goods and the threshold under the new taxation regime. It distributes voting power between states (67%) and the Centre (33%) and requires 75% votes to pass a motion. Therefore, effectively, neither the Centre nor the States can take a decision independent of the other. However, this might be cause for concern on two grounds:

  1. Decision making in the council can get painfully slow due to this very division of power if there are many different political parties at the helm of the Centre and the States.
  2. The federal structure may end up being meaningless if the same political party is at the helm of the Centre and a large number of States. This is true for the NDA as of now, which is at the Centre and forms the government in 14 (out of 29) States.

Hidden behind the more shimmery benefits is the GST’s potential to change the gears of India’s economy to a manufacturing-led one from a services-dependent economy. To quote from one of my earlier articles “India has had a growth story in terms of the composition of the economy which is divergent from the usual trajectory. Our service sector grew much faster than the other sectors of the economy. So today while we are a global behemoth in services (think IT sector, BPOs and hospitality), we still lag behind in manufacturing.” With the introduction of the GST, services be treated at par with goods in terms of taxability. The overall tax rates on manufacture (excise+VAT/CST) will come down from the existing 12.5%+12.5% general rate, and services will be taxed higher from now on from the existing 15% rate. [For more details, read Service Tax Rate Hike: The Other Side]

The tertiary sector, by definition, was supposed to be a support base for the other sectors of an economy. It is only when production increases that banking, insurance, transportation and so on become important. With the underlying paced slow, services can only help our economy so much. It is therefore believed that the next wave of employment and growth will come from manufacturing and entrepreneurship. The GST can therefore be an important tool for the ‘Make In India’ campaign, augmenting the ‘ease of doing business’ and the ‘costs of making in India’.

The GST does look extremely promising. But like with everything with life, there is always another side. Find out this other side in the article in this series: GST: The Good and The Scary (II)

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5 thoughts on “GST: The Good and The Scary (I)

  1. nice thoughts simply put. a brief point I wish to add, under the heading No. 3 Cooperative Federalism. sub point 1+2 contradict each other. If a national party is in the majority of States , the voice of such a party will prevail and a decision taken in national interest will be passed in the GST council too ( decison making will be swift and not slow then) . The hypothetical situation of Point 1 will arise if each of the 29 states are ruled by different parties. then Mayhem could ensue.

    Liked by 1 person

    1. Thank you! I am glad you liked it.
      Also, yes, thanks for pointing that out. What I meant to say rather was that either of the two situations is very likely to arise. I did not mean to show them to occur together. But I see how that meaning might not be clear at once. I have changed a few words to remove this ambiguity 🙂

      Liked by 1 person

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