GST Impact Analysis

GST shall impact everyone in the economy. GST is expected to bring uniformity in taxation and reduce its cascading effect leading to cheaper goods and services. Currently, excise and value-added tax (VAT) cannot be offset, so they cascade. In addition, VAT credits cannot be carried across states. Both these characteristics would change under the GST regime. Multiple exemptions exist under the present tax system – the Centre has ~300 items exempted from central excise duty, while the States (together) have ~90 items exempted from VAT. These will be merged into a Final synchronized exemption list under the GST regime. While imposing the GST on essential goods that are currently exempted from either excise or VAT or both would be regressive in nature as their prices would shoot up, the more the exemptions that are retained the higher will be the standard rate. Hence, the government must limit exemptions to essential goods in an ideal GST regime. Impact of GST shall be as follows:

GST Impact on Industry, Economy, Supply Chain, Logistic, Consumers

1) Cost of services to increase:

As against the current service tax rate of 15%, proposed rate of GST around 18% shall result, increase in the cost of services. Hence the final consumer shall have to bear the burden of increased rate.

2) Boost to exports:

Currently, exports are reimbursed for central indirect taxes (excise and customs duties) but don’t get full offsets for CST and certain state level taxes such as entry taxes and octroi. Post GST, this non-rebated indirect tax-induced distortions would be removed, enhancing competitiveness of Indian exporters. Based on study done by CRISIL, GST will be largely a beneficiary for Automobiles, Cement, Media and Entertainment sector. GST will have a negative impact on service industries such as restaurants and quick service restaurants (QSR). Impact of GST on real estate will depend on its treatment with regard to abetment value.

3) Supply chain to improve:

Since all the procedures under GST will be online, physical check posts shall be dismantled. Further there will be online verification of tax credits, check posts will not be required. This shall result in speeding up the movement of goods. It has been reported that as against global average of travel distance of 800 km/ day by trucks, travel distance in India is just 400 km/day. Main reason for delay is the congestion at the check posts. CRISIL Research expects the rollout of goods and services tax (GST) to bring down the logistics costs of companies engaged in the production of non-bulk goods by as much as 20%. Savings will accrue as a result of phasing out of the central sales tax (CST), consolidation of warehouse space, faster transit of goods since local taxes will be subsumed into the GST and as state level check posts will be dismantled.

Indian corporates spends an average of 6-8% of sales towards logistics. GST is expected to provide a costs savings to the tune of 1.0-1.5% of sales over a 3-4 year period. Eliminating delays at check posts will yield additional savings of 0.4-0.8% of sales, which will take the overall logistics costs savings to upto 1.5-2.0% of sales for companies. These cost savings are, however, more likely to be gradual and back ended as corporates will have to realign their supply chain while ensuring minimum business disruption. Sectors that have set up warehouses due to tax considerations like consumer durables, pharmaceuticals, FMCG, and cement will be key beneficiaries.

4) Organized sector to gain further:

Since GST shall cover the entire chain of transaction upto end consumer, the scope to hide the transactions from regulatory authorities shall reduce drastically. Hence the organized sector which as such is currently paying the taxes shall have a level playing field with the unorganized sector which currently has the cost advantage by choosing not to pay the taxes. This shall benefit the organized sector tremendously.

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