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2015

Economy Updates – Jul-2015

Impact of GST on Indian Economy

  • According to a report by the National Council of Applied Economic Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per cent.

Impact on Industry & Business

  • Indian manufacturing sector considered as one of the highly taxed sectors in the world. GST would eliminate complexities in the present taxation structure and remove cascading effect which ultimately results in lower production cost. Service Section will also get benefited because of seamless availability of tax credit.
  • Take an example of a CA firm. CA Firms are service tax payers and hence unable to utilize VAT paid by them for purchases of laptop, furniture, air conditioners, stationeries etc. After introduction of GST, the same shall be allowed as there will be single taxation called GST instead of multiple taxes. Hence, cost of providing service will substantially go down leading to the increase in the competitiveness as well as profits.

Impact on Exports

  • The subsuming of major Central and State taxes in GST, and allowing setoff of input goods and services would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and will give boost to Indian exports. It is estimated that exports are expected to increase by between 3.2 per cent and 6.3 per cent.

Impact on Logistics

  • GST will transform the way goods are transported within the country.
      India World Average USA
    Average speed of truck drivers 280 km per day 400 km per day 700 km per day

    Reason for such under performance Few Facts Impact
    • Archaic laws
    • 29 states – different taxes of each states
    • Inter-state check posts
    • Truck drivers spent 30% to 40% of the time at the check posts and toll plazas
    • There are approx 650 check posts in the country
    • Productivity Loss
    • Need for Buffer stocks
    • Loss of perishable goods

  • The GST is aimed at reducing multiple taxes and hence, after introduction of GST, Inter-state sales transaction will become tax neutral. The whole country will become one single common market without any state borders and hence, transport efficiency will improve.

Impact on Warehousing

  • At present, in India warehousing is done the basis of state-wise tax structures rather than operational efficiency. Higher numbers of warehouses increase the cost of storage.
      India Developed Countries Developing Countries
    No. of warehouses of FMCG companies with similar geographical area 25-50 warehouses 5-8 warehouses 10-15 warehouses

  • Post GST scenario, location of the warehouse would be more driven by the market forces of demand and supply and hence will increase operational efficiency.

Conclusion

  • GST is going to be the biggest tax reform our country has ever seen. It is expected that GST will give boost to the economy. However, at the same time there are certain apprehensions also regarding success of GST. Most of the international case studies show higher inflation in initial months of GST implementation. The inflation situation stabilizes as implementation gains pace and is understood by consumers and producers. GST reform in India is far larger in scale compared to other economies. Indian economy is already plagued with persistent high inflation and this new reform could further test inflation further.
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