Implementation of a national GST replacing a plethora of central and state taxes in India is the most critical economic reform being attempted since the “economic liberalization” program in the 1990s, when India dismantled government controls on private and foreign ownership and drastically reduced barriers to trade. Just as the economic reforms of the 1990s unleashed new entrepreneurship and economic growth, the GST could potentially be a game changer for the Indian economy.

The existing system of multiple levels of taxes under different central and provincial administrations creates significant hurdles for the integration of production networks and supply chains, while imposing substantive transaction costs in business and logistics operations in India. Logistics costs in India are estimated to be around 14 percent of GDP, compared to below 10 percent in most other major economies. Similarly, the additional cost of compliance in dealing with a multiplicity of taxes is estimated to be around 1.5 to 2 percent of GDP.

An easier and more transparent taxation regime would make the Indian market even more attractive to foreign investors. Indian and global firms already based in India could look towards rationalizing their production and distribution networks to leverage economies of scale and increase productivity, instead of focusing on tax arbitrage. This could open up the potential for new investment in bigger and more technologically advanced facilities, and more centralized and efficient warehousing solutions.

While GST provides a great opportunity for the logistics sector in India to be a partner and a catalyst for this transformation, it also means the industry must get “GST ready” and be ahead of the curve in anticipating the transport and warehousing solutions customers in different sectors would want. The specific needs and channels of distribution of different sectors need to be considered. For example, the e-commerce segment would be impacted by new taxation rules under GST for online transactions, as well as for movement of goods between warehouses owned by the same entity (referred to as “stock transfers” in Indian tax parlance).

All the benefits of GST discussed here assume that implementation of GST would be smooth and the existing bottlenecks imposed by the current system – i.e. impediments to efficient intra-state movement of goods and dealing with multiple tax administrations – would be eliminated. There is still some uncertainty whether or not all the states would agree to all the administrative reform measures, and lack of success on this front could lead to much-diluted gains from GST. — Pritam Banerjee

Summary of key facts about GST and the next steps towards implementation

  1. The GST will have a four-rate tax structure; 5 percent on items of basic consumption such as food, rates of 12 percent and 18 percent on most other goods and services, and 28 percent on what the government defines as “luxury” goods that would cover expensive consumer items.
  2. Aside from both houses of Parliament, all state legislatures also need to ratify the GST bill. So far 23 state legislatures have done so, while eight states are yet to do so, including some large states such as Uttar Pradesh, Karnataka and West Bengal.
  3. Central government and the states are also negotiating key issues related to administrative jurisdiction and powers of assessment. While the microlevel issues need resolution, there is macrolevel political commitment at both the central and state government levels to roll out GST in 2017. India stands at the cusp of a transformational reform.

Published: February 2017

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