continued from previous blog…
GST, at a broad level, is expected to be beneficial to all stakeholders – corporate entities, consumers, government and overall economy.
Corporate entities will be benefitted by reduced tax burden and cost of production leading to improvement in profitability.
Cost of production for majority of companies is likely to decline due to various factors. With the implementation of GST, the concept of state boundaries is expected to disappear. Companies may set up new plants at locations, which will minimize total delivered costs. Regional warehouses will be closer to the market to ensure shorter distribution routes. This will lead to reduced stock in transit and inventory. Moreover, short routes will reduce freight costs. The concept of a common nation is likely to make state entry checkpoints redundant and facilitate rapid clearance of goods.
Other benefits for the businesses
- Direct dispatches
- Depot roadmap
- Opportunities in imports
- Savings in manufacturing
- Service tax credits
Consumers are expected to benefit from reduced prices of goods and services, which in turn increase consumption. Improved demand, and simplified tax structure will help attract increased FDIs and FIIs and boost overall economic growth. At the same time state and Central governments are likely to benefit from a broader tax base.
…however, there are some concerns
Spike in inflation over the short term
There is a risk of price hikes in the short run if tax rates are very high. “If rates are high, these will lead to inflation, which will be detrimental to consumers. The empowered committee had suggested a revenue-neutral rate of 27%; it should ideally be below 20%. Earlier studies had suggested that it should be between 12%–16%, if goods have to be competitively priced and there is no inflationary pressure,” said Harsh Mariwala, Chairman of Marico.
Moreover, companies from sectors such as automobiles, pharmaceuticals, consumer products and food processing, which enjoy benefits of tax (excise, VAT, income tax) concessions by setting up factories in the states, which offer concessions, will be affected adversely by GST. Their cost of production could go up, in turn, leading to increased prices.
The phenomenon of spike in inflation was observed in other countries where GST was implemented. In these countries, prices shot up in the short run. Inflation stabilized as the implementation gained pace and there was more clarity among consumers and manufacturers. In India, sharp increase in inflation is likely to be tricky.
Impact of GST implementation in various countries
Risks in GST implementation
- Disruptions in business operations, IT, cutover
- Getting manufacturing strategy wrong
- Getting pricing wrong
- Loss of sale/no-clarity on impact of SMEs and traders
- Sub-optimized distribution leading to higher costs
- Administrative procedures not clear (contracts/liabilities)
- Investment risks go-live date postponed
In conclusion, a company could look at the following 8 principles while implementing GST. The implementation of GST could impact the existing processes, people and technology
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