IN THE DRIVING SEAT: GST has made life easier for truck driver Rakesh Pratap Singh.

Truck driver Rakesh Pratap Singh’s taut face has fewer trench-like lines since India launched a uniform national sales tax, replacing a complex web of myriad levies. He now takes three days, gaining one whole day, to haul his 23-ton, 18-wheeled, yellow DHL truck nearly 1,350 kilometers (840 miles) from Mumbai on the west coast to Chennai in the southeast.

The only thing the 42-year-old appreciates even more than the time saving is the huge relief from nerve-wracking hassles that he had to endure in the past, such as having to stand in queues to take photocopies of documents and join new lines to make payments at each of the dozen entry and exit points at municipal or state boundaries on the route. “Life has become easier for transporters,” says Singh, who is usually on the road from 5 a.m. to 11 p.m. “It used to take three to four hours to get past every checkpoint,” he bemoans, remonstrating that most of these outposts had no restaurants in their vicinity where drivers could grab a quick bite after the painstakingly lengthy procedures, which included paying various taxes at different windows, each involving serpentine queues and much paperwork. “Now, you can get through in less than an hour, sometimes in 10 minutes,” he grins.

Vimal Kumar Chaurasia, 25, who also drives a 40-foot DHL container truck, breathed a sigh of relief at the introduction of the Good and Services Tax (GST), which is touted as the biggest tax reform undertaken by India since the country’s independence from British colonial rule in 1947.  

CALL TO ACCOUNT: GST swaps old-style paper returns for digitalization and electronic payments.

Easier for business

The GST, which launched on July 1, 2017, replaced a bevy of complex federal, state and municipal taxes and duties with a consolidated national tax, effectively tearing down trade barriers within India’s 29 states and seven territories where the federal government has greater oversight, and enabling a common market for the subcontinent.

By focusing on digitalization and electronic payments, the GST aims to simplify procedures, bring transparency, improve efficiency and make it easier to do business. It also ensures better tax compliance that would eventually allow for reduced tax rates. The GST works on a concept of “input credits,” where a manufacturer, service provider or exporter can claim refunds on taxes paid on raw materials or costs incurred, forcing all businesses – including the hundreds of thousands of small vendors who have never paid any taxes until now – to register and become GST-compliant.

Like everything in the world’s largest and noisiest democracy, reforms face formidable hurdles and take time to pass muster. The idea of “one nation, one tax” was conceptualized in 2000 and the initial target for rollout was April 1, 2010, but it took another seven years for the government in New Delhi to get it off the drawing board. To reach consensus across the political spectrum in all states and territories, the federal ­government made compromises, most notably settling for a four-slab system of tax rates – 5, 12, 18 and 28 percent – with some items, such as fuel and liquor, which are taxed at much higher rates, left outside the GST. In most countries, this kind of tax is usually only charged at one or sometimes two rates.

Over the past two months, New Delhi has moved many items from the highest brackets to lower GST slabs, enabling companies to boost sales and cutting prices for consumers. Over time, the number of slabs is expected to be reduced to two.

We believe that over the next 12 to 18 months quite a lot of FMCG players will go ahead and set up large DCs (distribution centers).
Vikas Anand, Managing Director, DHL Supply Chain India
LINE OF DUTY: Long waits at checkpoints have been reduced thanks to India’s new tax regime.

Gamechanger

Doubtlessly, the GST is a gamechanger for India’s $2.3 trillion economy. It’s already Asia’s third-largest after China and Japan, is expanding between 6 and 7 percent annually and is expected to accelerate to near double digits in the next two to three years.

 The GST is designed to force the country’s sizable informal sector, most of which pays no taxes, to come on board and help pave the way for better compliance, improved data collection, upgraded skills and increased productivity. The task is big. As many as 85 percent of the enterprises in India are in the unorganized sector, according to Rana Kapoor, CEO of private sector Yes Bank. The informal sector accounts for almost 40 percent of the Indian economy and employs nearly 75 percent of the workforce. He estimates the GST will bring at least a million new enterprises within its ambit.

 Over the longer term, Kapoor wrote in a report, there will be a shift toward better efficiency, brought about through the allocation of productive resources and government facilitation. This will help create globally competitive companies, better-quality jobs and a lower tax burden.

In the World Bank’s latest ease of doing business index, released in October, India jumped 30 places from its position a year earlier to enter the top 100, bolstered by a string of reform measures undertaken by New Delhi over the past three years. As the GST rollout ­happened after the cutoff date for the study, there will no doubt be further gains in the ranking when its impact is factored in next year. Prime Minister Narendra Modi, whose first term in office ends in 2019, aims to bring India into the top 50.

CUSTOMER BASE: Foreign businesses are tapping into consumer demand driven by rising incomes.

Rising foreign interest

 A simplified tax regime is a huge draw for businesses, particularly large global companies, to invest in India – especially as the country is on course to top the world economic growth rate table for years, like China did over the past two decades.

 Foreign direct investment in India grew to $25.35 billion between April and September last year, up 17 percent from the same period a year earlier, according to official data. More than half of India’s 1.3 billion people, the world’s largest population after China, are below the age of 25, meaning they have at least three decades of productive work time ahead of them. Rising incomes and lifestyle changes thanks to exposure to cable TV networks are driving demand for everything – from fashionable dresses to high-end mobiles, sporty motorbikes and cars, eating out and foreign travel. Besides manufacturing companies, global insurance and asset management firms are also expanding their operations in India.

Global accounting firms and information technology service providers are in great demand to help companies prepare for GST compliance, and their services will be needed for many months until the system stabilizes. Big businesses are among those who stand to gain the most from the GST. “The GST is helping us tremendously,” says Adi Godrej. Speaking to Indian newspaper Business Line, the chairman of the Godrej Group, which has annual revenues of more than $4 billion, continued: “Our profits are up primarily because GST is helping the economy.” Godrej’s businesses include fast-moving consumer goods (FMCG), which compete with the Indian unit of Unilever plc, home appliances, property development and agribusiness.

While the GST would bolster the fortunes of all businesses, the logistics sector is the biggest winner because its growth has until now been stifled by multiple taxes. In the past two years alone, since the Modi administration made GST a priority, foreign investors have moved $1.5 billion into the warehousing business, according to media reports.

BUSINESS SENSE: A simplified tax regime is proving a big draw for companies.

“These are exciting times to be in India,” says Vikas Anand, Managing Director, DHL Supply Chain India, who expects FMCG makers to lead the shift toward building large warehouse clusters in the coming years. “We believe that, over the next 12 to 18 months, quite a lot of FMCG players will go ahead and set up large DCs (distribution centers),” he says, moving to a “hub-and-spoke model” that would help established operators with the expertise and infrastructure to ride the emerging need for efficient and cost-effective logistics management. DHL Supply Chain has spent €100 million over the past five years to build three million square feet of warehousing space as the company has stepped up its foray into emerging markets. Each “big box” contains more than 200,000 square feet – more than 10 times the average size of warehouses in India.

Speed bumps

One of the downsides of the GST administration has been delays in releasing input credits, affecting cash flows and forcing companies to cough up additional working capital. For any manufacturer or service provider to get his or her refund, all the ­intermediaries must have filed their GST returns on time. Most experts believe it would take up to a year for the online systems to stabilize and allow smooth functioning.

EXTRA STORAGE: Logistics has been boosted by GST, leading DHL to invest heavily in warehouse infrastructure.

The biggest stumbling block is the reluctance of the unorganized to register for GST, fearing they may become vulnerable to tax queries on concealed past incomes. The government has promised it will not harass businesses, but it is still a leap of faith for hundreds of thousands of traders and small businesses to undertake. “The only complaints to my mind are coming from people who are not used to paying taxes properly,” Godrej was quoted as saying. “They are the only ones affected and they are the ones complaining. Ethical companies will do well and unethical ones will have to get ethical.” —  Ranjit Gangadharan

Published: January 2018

Images: Philippe Calia; Bloomberg/Getty Images; Rajanish Kakade/dpa