GST impact on Indian Economy

What will GST mean for the Indian economy overall

There are a variety of estimates of the benefits of GST to the Indian economy. Firstly, in terms of tax efficiency and reduced compliance, it will be a big boon for business. The secondary impact of GST is likely to increase GDP growth by 200 bps over the next 3-4 years. GST also brings India’s indirect tax structure in tune with global benchmarks. The only downside could be that oil & gas is outside the purview of GST. Since this sector accounts for 28% of indirect tax collections, it may substantially dilute the beneficial impact of GST. But surely GST reduces the transaction cost in India by creating one big unified national market. That could be the biggest economic takeaway from

Impact -> Positive.

 

What GST means for Indian IT Companies ?

GST subsumes levies like excise duty, sales tax, service tax and octroi duty. The most important requirement will be for the software systems and legacy applications to be urgently upgraded. All Indian companies need to deal with software for payment, management and documentation of tax payments. To factor in the impact of GST, the existing systems will have to be made more adaptable, scalable more customized. In a nutshell, it will open up a huge business Opportunity for software companies in terms of migrating systems, modifying legacy applications, upgrading capacity and getting GST ready. Like the big gates opened by Y2K and ERP, the GST could be a game changer for Indian software Companies.

Impact -> Positive

 

What GST means for Indian FMCG Companies ?

The current system of multiple levels of taxation has forced FMCG companies to create a warehousing and distribution system that is tax efficient rather than being business efficient. A lot of the warehouses that FMCG companies maintain currently can now be rationalized. That will result in huge cost savings for FMCG companies and permit them to have a distribution system that is driven by customer needs than by tax dictates. FMCG companies may face another unique problem. Currently, FMCG companies pay VAT at the time of sale and not at the time of transfer of stock.

However, GST being a destination tax will have to be paid at the time of stock transfer. That means, the gap between payment of tax and claiming the refund takes much longer.

Impact -> Positive

 

What does GST mean for the Indian Pharmaceutical sector ?

Pharma sector may be the key beneficiary of GST. Currently, the pharma companies pay import duties and state taxes on which they do not get adequate credit. With a single unified all-India tax, this process of claiming tax credit becomes simpler and more efficient.

Effectively, the biggest problem for pharma companies is that credit for taxes tends to seep away. This will be prevented by the introduction of GST. The second major advantage of the GST is that it will lead to the gradual shift from the unorganized sector to the organized sector. Currently, 95% of the pharmacies come under the unorganized sector. Introduction of GST will bring more foreign FDI into the distribution side and make the entire value chain more efficient.

Impact -> Positive

 

What does GST mean for the Indian automobile sector ?

Most Indian auto companies follow the typical hub and spokes model for distribution. Sadly, currently even their distribution model is determined by the rates of taxes prevalent in various states. Like in the case of FMCG companies, even auto companies will have to seriously rethink their distribution and warehousing strategies.

Many of the taxes paid by auto companies that were not eligible for VAT credit, will now be available for credit. The downside is that the GST, being a destination tax, will have to be paid on the goods transferred. Thus the GST will have to be paid even before it is actually sold. That will create a problem in terms of valuation and also extend the time lag for tax credits. On the positive side, companies like M&M which are already paying much higher rates of taxes closer to 40% will benefit if the GST is fixed in the range of 18-20%.

Impact -> Positive

 

What does GST mean for the Indian telecom sector ?

The telecom sector has been the largest contributor to the service tax kitty. Total taxes borne by telecom companies are in the range of 22-32%. Therefore, if the GST rate is in the range of 18-20%, it should be beneficial. There is another very specific issue to telecom. Service providers sell SIM cards to distributors at a discount, but pay tax on the full amount. Now the service providers have also been asked to deduct withholding tax on dealer margins. This double taxation will be avoided once GST is introduced. Broadly, telecom too should benefit.

However, since GST will be a destination tax, it will be essential to define the place of consumption to avoid any confusion. This has already been defined in other countries.

Impact -> Positive

How GST will impact the Indian Financial Services sector ?

It may sound strange but the GST will impact the financial service sector too. Fund based services currently do not attract service tax and it is only the fee based services that attract service tax.

However, once the GST is introduced, it may encompass all activities that do not involve goods. Obviously fund based services will also come under the net of GST. That will be a temporary setback for banks and NBFCs. Unless fund based services are specifically excluded from the list, it will come under the ambit of GST. Watch out!

Impact -> Negative

 

What will GST mean for the Indian logistics industry ?

In fact, logistics is one space that will benefit substantially from implementation of GST. The big opportunity will arise from companies remapping and realigning their supply chains. With GST being a destination tax, the entire old system of warehouse management will become redundant. Today due to the multi-tiered tax system, warehousing and logistics are driven more by tax aspects. With the introduction of GST, the entire warehousing and logistics will be aligned on the efficiency.

Impact -> Positive

 

FWD by a CA Friend