In the biggest tax reform since Independence, the Goods and Services Tax Bill was on Wednesday (03 August) passed by the Rajya Sabha to replace a raft of different state and local taxes with a single unified value added tax system to turn the country into world's biggest single market.
The GST may bring down transaction cost for retail businesses thus helping reduce prices.
Analysts expect a strengthening of supply-chain management to bring about lower inflation, which would be crucial for policymakers, given the new inflation targeting framework that India adopted last year, according to a report in Reuters.
The new tax regime may not have a uniform impact on all sectors however. At present, the moot question is: Will the GST have an impact on the retail sector? Economists are of the view that in retail sector, the implementation means a seamless integration of goods and service transaction across the states. It will have benefit at different stages of the value chain
Positive ImpactCompanies could generate substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated. FMCG companies pay nearly 24-25 per cent including excise duty, VAT and entry tax. GST at 17-19 per cent could yield significant reduction in taxes.
Warehouse rationalisation and reduction of overall tax rates, is expected to generate saving which could cumulatively range between 200-300bps. If the GST rate is less than or equal to 18 per cent, then it should be positive for most consumer goods companies. Of course, much depends on which exemptions are retained and which of the current excise benefits are “grandfathered”.
In addition, there will be gains from warehouse rationalization and a better competitive position vis-à-vis unorganized firms. But gains aren’t expected to be massive and will occur gradually; as such, stocks may not react dramatically just because the GST bill is passed.
If cigarettes attract a higher tax incidence under the GST regime, then it will have an adverse impact on companies such as ITC Ltd.
Negative ImpactIf the recommended 40 per cent "sin/demerit" GST for aerated beverages and tobacco products is levied, then prices may increase by over 20 per cent. Food companies: many see increase in effective tax as many companies enjoy concessional rate of excise.
“GST will make India a truly common economic market. It will accelerate economic growth. The impact on each sector however will be different. The real challenge now will be to have rational GST law and Rules to ensure that objective of GST is met. Equally important is that tax rate should be moderate to avoid inflation,’ said Nihal Kothari, Executive Director, Khaitan & Co.
