The proposed Goods and Services Tax (GST), which is slated to be introduced by the Government of India from April 2010, is a part of the tax reforms aimed at putting in place an efficient and harmonized consumption tax system in the country, in opposition to, and replacing the multiple taxes currently in place.
World over, goods and services attract the same rate of tax. That is the foundation of a GST. The GST is proposed as a comprehensive indirect tax on manufacture, sale and consumption of goods and services nationally. It would result in India having a tax system at par with rest of the world and also help improve tax collections. It is also supposed to bring an end to distortions of differential treatments to manufacturing and service sector. It would lead to an abolition of taxes such as Octroi, Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services and multiple taxation in the country. GST will facilitate seamless credit across the entire supply chain and across all states under a common tax base.
According to the 13th Finance Commission Chairman Mr. Vijay Kelkar, the GST will reduce manufacturing cost and benefit end-customers. The implementation of the tax would also result in Indian manufacturing sector being globally competitive. It would also promote the entrepreneurial initiatives and economic activity on the whole.
Challenges Ahead
The dual GST model proposed for India comprises of Central GST and State GST being administered simultaneously on supply of goods and services. In its wake, Government has several challenges to tackle.
Legislative challenge will be the first to surface because of India’s federal structure where by, states have autonomy to collect taxes. Industry experts feel that a common GST is the need of the hour to curb the possibility of different States, especially with a dissenting political party, enacting different Acts as per their whims and fancies.
Revenue Sharing: States need revenue, and new tax regime has to ensure that states get their requisite revenue to prove successful. With the growth of economy, the need for revenue would be constantly on the rise and the Central Government will have to do a balancing act between the revenue-rich States and revenue-low States by properly sharing the revenue as per their needs.
Strong Credit Mechanism: The success of dual GST model will depend on effective credit mechanism to avoid cascading effect of multi-stage taxation in the supply chain. The credit mechanism is the lifeline of GST. Industry experts also feel that in order for the GST to successfully make India an economic ‘union’, the credit mechanism must be streamlined without the federal structure proving to be a hindrance.
Impact on Logistics Industry
The introduction of GST in India would mean that manufactures will now base their logistics decisions on operational efficiency instead of tax optimization. It will enable manufacturers and 3PLs to set-up and position their warehouses and distribution channels based on the considerations of time, cost and logic, in contrast to the present when in order to save on Central Sales Tax (CST), manufacturers had to maintain warehouses at multiple locations to show movement of goods from one warehouse to another.
GST will also have a direct positive impact on the business of logistics providers since manufacturers will now be encouraged to outsource their logistics and supply chain operations.
The Government’s proposed initiative of providing tax benefits to companies investing in warehousing for agricultural produce or in cold chain infrastructure is a positive move, being welcomed by the Logistics industry. This will result in an exponential growth of warehousing business, as well as fuel the faster growth of the entire supply chain and logistics sector.
The roadmap for GST as provided by the Government, looks promising for the sector, and the economy as a whole. With the high current growth rate of the Logistics industry, and expected exponential growth of this sector, it is certain that this sector will play a significant role in the economic development of India.
