As soon as July 1 2017 arrived, the record book of India’s tax administration witnessed a paradigm shift with the much awaited launch of Goods and Services Tax (GST) in the hall of Parliament. A host of central and state government taxes such as sales tax, service tax, VAT, excise duty, entertainment tax, luxury tax and several others had taken toll of the businesses for long. This unbearable pain is all set to vanish now as GST is now implemented. Still, there is a lot of curiosity to understand the new system. From top business executives to small enterprises, everyone is trying to get an idea of what the new indirect tax reform has to offer. The impact of GST will be monumental as far as reshaping the economy is concerned. By removing the multiple taxation system, the GST would lead to the birth of many new-age entrepreneurs, who had kept their ambitious business plans on hold due to the existence of multiple tax levies.
So, why not grasp the GST impact on the Indian economy which is moving up the ladder? Since the economy is a constituent of several segments having different market dynamics, it makes sense to study the effect of the new indirect tax separately in each of the segments.
Table of Contents
- 1 Impact of GST on Manufacturing Sector
- 2 GST Impact on Agriculture Sector
- 3 Impact of GST on FMCG Sector
- 4 Will Import and Export Flourish Under GST Impact?
- 5 Mixed Bag for Tourism & Hospitality Sector
Impact of GST on Manufacturing Sector
The Make-in India initiative, which was launched a few years ago, is driving the growth of the manufacturing sector, which contributes around 15% to India’s GDP. But to get it pedal all the way needs a unified tax system which comes with GST. In the pre-GST years, the manufacturers were getting victimized by a vicious cycle of taxes, and by virtue of that, many have had to shut down their shops. Here are some of the benefits that GST has in store for the manufacturing sector to avail.
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Transportation Costs to Fall
The removal of multiple tax levies would eliminate the requirement of paying taxes at different checkpoints across various states. Almost half of the logistic time and effort can be saved, which would ensure a faster delivery of the products. The unified tax would lead to a considerable fall in the transportation costs and thereby help the manufacturers produce a better quality product at competitive rates.
Top Corporate Orders to Flood
Large business enterprises were placing the orders of equipment production to ancillary units located in their region before the GST. This was because of the fact that many small units, despite producing better quality products, refused to entertain such orders as they were getting trapped under the effect of double taxation. First, they had to pay the taxes in their state and secondly the state in which the goods are going to be transferred, making it a highly expensive affair for small units. By not taking the orders, their customer base and growth prospects lessened substantially.
But not anymore, as the single GST tax will let the small units transact with the corporate biggies and in the process would open a new chapter of growth for the SMEs, which despite being a hub of employment generation, have had to cripple under the adverse effects of multiple tax system in India.
Warehouse Requirement to Reduce Substantially
The pre-GST era prompted the manufacturers to make local warehouses to reduce cost. But with the much-needed arrival of GST, the requirement of warehouses will come down and thus reduce the cost considerably. The savings, resulting from the move, will help the manufacturers in producing goods on an economy of scale. It could also lead to the consolidation of the warehouses to give manufacturers the much-needed saving. Such savings would improve the quality of services and lower the cost of products at each stage of the delivery.
GST Impact on Agriculture Sector
The agriculture sector, which contributes 16% to the country’s GDP, is eyeing on a new era of growth under the GST regime. The new indirect tax reform is likely to bring efficiency, transparency and improved supply chain to benefit the sector participants. With better supply chain management, the wastage and cost for farmers and retailers can be reduced. It also brings a reduction in the cost of heavy machinery needed to produce crops. The reduction in cost can prompt farmers to yield crops of better quality. The GST has a lot of logistical benefits for the farmers and distributors to avail, which could help them immensely in producing crops at lower cost.
A table below will show you the tax difference of pre-GST and post-GST periods.
|Agricultural Produce/Machinery||Tax Rate Before GST||Tax Rate After GST|
The traders, who will pay the taxes, can receive the input credit for the payment of the levies. This will ensure efficiency into the operation and a faster delivery of the agricultural products.
Impact of GST on FMCG Sector
The FMCG sector, the fourth largest segment of the Indian economy, has a giant market size of more than US$13 billion. The sector, like many, was also under the strain of multiple taxes such as service tax, VAT, excise duty, central sales tax, etc. The overall tax rate stood at 20%-25% before July 1, 2017. But under the impact of GST, the rates could come down to 18%-20% on an average. The input credit, which remained absent in the pre-GST era, would be available for the FMCG businesses to avail.
The Fast Moving Consumer Goods (FMCG) has a considerable overhead in terms of distribution with almost 2%-7% of the entire cost going into the logistics. However, with the implementation of GST tax, the cost could shrink to 1%-3%.
Want to check out the rates of various FMCG products under GST? Find those in the table below which also demonstrates the pre-GST rates.
|FMCG Products||Tax Rate Before GST||Tax Rate After GST|
Will Import and Export Flourish Under GST Impact?
The import and export of goods and services, in the pre-GST era, came under the purview of taxes such as custom duty, VAT, service tax and excise. The goods importers were made to pay countervailing duty (CVD), customs duty as well as special additional duty (SAD). The CVD levy was done at a rate equivalent to the excise rate of the goods if they were manufactured in India. On the other hand, SAD is equivalent to the VAT charged on goods in India. The CVD payment on several inputs qualified for the tax credit provided the individual or an organization is not a mere trader. The same applies to SAD payment, subject to certain conditions. However, custom duty remained the cost for importers as no credit is available here. Similarly, the import of services remained under the purview of service tax rate applicable. In erstwhile tax administration, the export of goods and services was free of tax and allowed exporters to claim the tax paid on the inputs.
But now, both SAD and CVD, which were used to be levied on imports, will be replaced with IGST. The customers will have to pay custom duty in addition to IGST (Integrated GST). The rate of IGST will be applicable to the rate of imported goods in India. The importers are allowed full input tax credits.
Even under GST, the exports of goods and services would remain zero rated. Also, the input tax credits are available for the exporters to avail.
Mixed Bag for Tourism & Hospitality Sector
The higher tax rates of 12%-28% under GST could well dig a hole into the revenue of hotel chains across India. The hospitality sector pays VAT, luxury tax and service tax. Both service tax and VAT come down from the levels of 15% and 12% to 9% and 6%, respectively, for a room with a tariff value of ₹1,000 due to the effect of abatement, under the pre-GST regime. But with GST, a room with a tariff of ₹1,000, there will be no tax. While for rooms with a tariff of above 1,000-2,500, a 12% GST will be applied. Rooms with a tariff of 2,500-5,000 and above 5,000 will attract 18% and 28% GST, respectively.
Although the administration hassles can be best addressed with GST, the higher rates can lead to a slow growth in the luxury hotel segment in the early days of the indirect tax reform. As service quality is set to improve with the advent of GST, the hotels can start leaping forward.
So, as you can see, the GST is going to have a huge bearing on the Indian economy, and particularly on the side of supply chain management. With reduced costs owing to the input tax credits, it is expected that the GST will bring a new wave of efficiency and transparency in the system which were earlier plagued with administrative hassles on the tax front.