GST rollout: How India's biggest tax reform will benefit economy

The much-delayed GST rollout can help boost the India's GDP growth by 1 to 2 percent as this will help faster and cheaper movement of goods across the country with a uniform taxation structure.

Zee Media Bureau/Ajeet Kumar

New Delhi: The biggest tax reform since independence, the GST, launched by President Pranab Mukherjee and Prime Minister Narendra Modi on the intervening night of June 30-July 1, catapults India into a select league of nations that have a single national sales tax.

The new tax regime has replaced the messy mix of more than a dozen state and central levies built up over seven decades, with a one national GST unifying the country's USD 2 trillion economy and 1.3 billion people into a common market.

The 66-year-old Constitution, which gives power to Centre to levy taxes like excise, and empowers states to collect retail sales taxes, was amended though the 122nd Constitution Amendment Bill.

The much-delayed GST rollout can help boost the India's GDP growth by 100-200 bps or (1 to 2 percent) as this will help faster and cheaper movement of goods across the country with a uniform taxation structure. New indirect taxation law is the most important reform towards creating a single market in India.

GST’s successful implementation would give a strong signal to the foreign investors about our ability to support business, besides; it will enable wide-scale changes in the tax structure which will have long term positive effects on our economy.

Currently, each state taxes goods that move across its borders at various rates, leading to multiple taxation.

The present taxation rate peaks at 26.5 percent (Cenvat of 14 percent, and VAT of 12.5 percent) apart from the state level corporate tax of 2 percent for transferring inter-state goods.

The proposed dual GST model (central GST and state GST) proposes to replace around 29 state and federal taxes and tariffs for a single tax at the point of sale. The current combined Centre and state statutory rates for most goods works out to be 26.5 percent but GST is expected to bring it down to 18-21 percent.

As per Care Ratings report, logistics industry is projected to grow at a compounded annual growth rate of 15-20 percent between 2015-16 and 2019-20 that will get a further boost.

Cost can also come down drastically as a one-nation-one- tax GST structure can massively reduce the long and winding queues at border check-points and other entry points within and between the states.

Another reason for lower logistics cost is that operators will be able to rationalize and restructure their warehouses and other logistical infrastructure.

Due to trade barriers such as the entry tax, local body tax, Octroi and other hurdles, trucks idle for 30-40 percent of the day, leading to huge man-hour and fuel losses, says the report.

Since GST will be levied on goods transportation and full credit will be available on interstate transactions, logistic cost is expected to come down by 1.5-2 percent of sales due to warehouse optimization and the resultant lower inventory cost.

According to a recent World Bank report, corporates can save up to 40 percent of their logistic costs incurred at check-posts and toll plazas.

According to the report, the higher growth of the logistic industry will be driven by e-commerce, GST rollout, government focus on local manufacturing, the new national integrated logistic policy, and 100 percent FDI in warehouses, food storage facilities etc.

But in spite of large potential, the industry remains entangled in complexities such as higher costs, a myriad of complex tax structures.

The logistic sector is primarily divided into four segments -- transportation, warehousing, freight forwarding and value-added logistics.

The transportation contributes the lion's chunk of 60 percent of the logistic pie, followed by warehousing compromising industrial and agricultural storage at 24.5 percent. Packaging and other related businesses constitutes the rest of the segment.

The existing interstate taxation system has forced companies to create and maintain warehouses in each state and at present each company has 20-30 warehouses, in addition to this 20-30 carry & forwarding agents in each state making the supply chain longer and inefficient.

While GST may push up inflation in the short term because the price of some goods will rise, economists say it will boost business activity and deter tax evasion. About 150 countries worldwide have some form of GST or VAT (Value Added Tax), according to the Organisation for Economic Cooperation and Development.