India tax reform to shake up trade

MUMBAI // Lubeina Shahpurwala, a cofounder of a company in India that manufactures socks, is among those who are eagerly awaiting the introduction of the new goods and services (GST) tax regime this year.

Widely considered to be one of India’s biggest economic reforms since independence, GST was first announced more than a decade ago. It was passed by parliament last year. It is set to revolutionise the way business and trade is done and boost exports, as it replaces a convoluted system of varying and multiple taxes across the different states with a single tax regime.

“GST will stimulate the growth of the industry helping in swiftly transitioning from a multilayered tax system to an allied one with perks like reduction in costs and efficiency in supply chain,” says Ms Shahpurwala, a partner at Mustang Socks, based in Mumbai. “With so many -connected elements that trade depends on, this standardisation could be just what the doctor ordered.”

There were plans to introduce GST in April but the expectations are that it may take a bit longer and its roll-out is likely to be delayed by a few months. Businesses across India and the wider economy are expected to benefit from the new system, with forecasts suggesting that it could add up to 2 per cent to India’s GDP.

“GST will transform India into one single market, which will bring in significant competitiveness among manufacturers and traders,” says Rahul Garg, the founder and chief executive of Moglix, an e-commerce platform for businesses, which has recently developed technology to help manufacturing organisations to comply with GST. “Since there will be one single tax subsuming myriads of taxes in play today, the predictability and ease of doing business will increase. This has got the potential to attract foreign investments further.”

He says that exports will also benefit from the move.

“On the global market front, with increased ease of doing business and simplified tax structure, Indian exports are expected to go up with better pricing and service,” says Mr Garg. “Overall, with GST roll-out, there will be parity among Indian manufacturers and traders vis-à-vis their global counterparts to compete on equal footing.”

GST will include a multi-tiered tax structure, with rates of 5 per cent, 12 per cent, 18 per cent, and 28 per cent. The lower rates will apply to essential and everyday goods, while luxury products will be subject to the higher rates.

“With the advent of the biggest and robust tax reform in Indian history, GST, India has gathered a glut of limelight from various countries across the globe,” says Gopal Jiwarajka, the president of PHD Chamber of Commerce and Industry, an industry body focused on north India. “The major outcome of GST on Indian exports, perhaps, would be rise in levels of productivity and thereby on competitiveness. With the expected sublime performance of GST on production process, many of the producers who were reluctant to export because of the complex filing and refund mechanisms of the multiple tax regime, will embark on exporting their produce.

“Another element is based on the productivity level, which gets hindered by the inverted duty structure where producers have to bear high costs because of taxed intermediate inputs made elsewhere in the country, rendering them uncompetitive compared to low-cost imported product. GST can eliminate such distortive elements.”

But there are a number of other headwinds facing India’s exports at the moment, including weakness in the EU and the unexpected US election results. But GST could play a role in rejuvenating trade, Mr Jiwarajka says.

“Surely, the GST regime will streamline the process – from production of a good to the shipment at ports – tremendously, that will transform Indian trading system into a sustainable mechanism in the coming years.”

Experts argue that the move to introduce GST cannot come too soon, given that the existing system is a major hindrance to business and trade.

“GST will definitely have a wide impact on trade within India,” says Aditya Berlia, an executive board member of the Apeejay Stya and Svran Group, a family-run industrial and investment house in New Delhi. “Earlier, rather than being one country, India behaved like a continent, with different taxation rules and numbers at each state level. With a proper implementation of GST India will take a giant leap towards being a single market.”

But he does not expect the system to be flawless, by any means.

“There is a danger that in order to appease various stakeholders a diluted form of GST will come in to play that will erode many of these benefits. States might also continue their checking of goods on their borders in the name of security in order to collect fees and informal taxes.”

Praveen Somani, the director of Kolkata-based Inland World Logistics, says that GST will -alleviate a number of the challenges that are currently faced when moving goods around the country.

“GST implementation is going to ease the stoppages at check post, reducing the transit time for vehicles,” he says. “Many smaller business were not able to expand because of different permits but now those bottlenecks will not be there.”

But Mr Somani says that small businesses might face more challenges and find it time-consuming when making the transition to become GST compliant.

There are likely to be some teething problems with the -system and there could be an inflationary effect initially, while a high cost of compliance will be passed on to the consumer, says Shubham Jain, the managing -director of JP Infra, based in Mumbai.

Anwar Shirpurwala, the executive director of the Manufacturers’ Association of Information Technology, says that while he thinks that GST will benefit his sector ultimately, in the short term, he says it will “be disruptive because of transition issues while migrating into the new -regime”.

He also raises concerns about whether some of the industry’s products might be subject to higher taxes in some cases.

“Currently, sale of certain goods, IT products, is amenable to a lower rate of 5 per cent to 5.5 per cent across states. While the rate of GST has been announced, there is no clarity on what is the rate of GST that would be applicable on the products and services.”

But Mr Shirpurwala remains upbeat and welcomes the move, which he believes will be beneficial for the future of trade in India.

“It will surely have a positive impact in long run.”

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