Regional Economy
GST: Facilitating India’s Domestic, Regional and Global Integration
16 Aug, 2016 · 5105
Prof Amita Batra explains how the recently passed GST Bill, once implemented, could be useful for India both domestically and internationally
After being first suggested by the Kelkar Task Force on indirect taxes over a decade ago, the Goods and Services Tax (GST) is now ready to see the light of day, thus marking a major step forward in indirect tax reform in India; and thereby facilitating India’s business environment and trade efficiency.
The GST is a single tax, essentially on value addition at each stage of manufacturing, allowing credit of input tax at the previous stage. The single GST will subsume major central and state indirect taxes - including the central excise duty, additional excise duty, service tax, countervailing duty, special additional duty of customs, state VAT, entertainment tax, octroi and entry tax - so that, as multiple taxes and taxation points are replaced, tax payment and compliance will be simplified and transparent. It is expected, therefore, that the GST will not only be revenue enhancing but also capable of eliminating cascading effect. Both producers and consumers are potential beneficiaries of the GST. The former, through ease of movement of goods across states, will benefit from improved logistics performance and scope for consolidating supply chains, and reduced transaction costs; and the latter, through reduced burden of tax translated eventually into reduced prices. Investors and manufacturing enterprises will find doing business to be tax neutral irrespective of its location anywhere in the country. Effectively, the GST will facilitate the creation of unhindered and predictable domestic commodity supply chains in India as also a unified market.
In the international context, the GST induced enhanced ease of doing business and logistics performance is better understood when viewed against the performance of a comparator country set. Of the 189 countries surveyed for the 2016 World Bank for Ease of Doing Business report, India ranked 130th. While this was an improvement of four ranks from India’s ranking from the previous year, there was no change in the rank for the constituent element of ‘trading across borders’ (that includes documentary compliance and domestic transport). It also shows a negative change or a fall from its 2015 ranking vis-a-vis the constituent element of ‘paying taxes’ (indicative of the overall tax environment of an economy that includes, among other aspects, the administrative burden in complying with the processes).
In the South Asian region, India has an overall rank of five among the region’s eight economies, and rank six and four respectively for the two constituent elements of ‘trading across borders’ and ‘paying taxes’. India has gained by 9.94 per cent with respect to its distance from frontier (measure of best practice), for procedures to start a business. And, the distance of 71.59 per cent in 2016 as against 61.65 per cent in 2015, is higher relative to the regional South Asian average.
However, of the 14 procedures that are required to start a business in India, as against an average of 7.9 in South Asia and 4.7 in OECD countries, the procedure for registering for VAT online, even though simultaneous with other procedures, takes ten days. As VAT (centre and state) gets subsumed in the GST and as tax implementation calls for a prior IT infrastructure to be in place, not only will the procedures get reduced in number, there will be a decline in time consumption as well.
Multiple taxes and procedures, differentiation across states and taxes makes compliance a complex task for domestic as well as external trade. With the introduction of the GST, almost all these procedural delays and encumbrances are likely to be eliminated, making India’s tax environment more conducive to business and India, a more attractive destination for investment with increased productive efficiency. Overall, the implementation of the GST will contribute to greater supply chain reliability, which is a critical input in a country’s global integration.
Reduced business costs and more efficient manufacturing supply chains can boost Indian exports that have over the past year experienced a downward growth trend. More importantly, the GST facilitated domestic market integration and supply chain predictability can be a major positive development for the ‘Make in India’ initiative. As international trade has slowed post the global financial crisis, logistics performance in the domestic context has acquired greater relevance than border issues in trade. The GST could thus be the innovative step forward for India in evolving its domestic supply chain in these critical times.
India’s domestic economic integration through the GST may also augur well for regional trade integration in South Asia. A more reliable domestic supply chain creates possibilities of India becoming the production and trade hub for South Asia. As South Asian economies struggle with the global growth slowdown and hence subdued demand for their exports, India could provide some succour by facilitating movement of goods within and across the South Asian region. The GST created unified Indian market could be a first step towards visualising the creation of a regional trade corridor.
Of course, the GST Bill creates only an enabling environment for the implementation of tax reform; and there remain political, administrative and infrastructure gaps that have to be appropriately filled for the transition to be complete. However, once this is accomplished, which, given the government’s announcement of a time schedule, is in all probability, likely to be in the next financial year, India will have a better chance of being integrated not just domestically but also in the regional and global economic context.
The GST is a single tax, essentially on value addition at each stage of manufacturing, allowing credit of input tax at the previous stage. The single GST will subsume major central and state indirect taxes - including the central excise duty, additional excise duty, service tax, countervailing duty, special additional duty of customs, state VAT, entertainment tax, octroi and entry tax - so that, as multiple taxes and taxation points are replaced, tax payment and compliance will be simplified and transparent. It is expected, therefore, that the GST will not only be revenue enhancing but also capable of eliminating cascading effect. Both producers and consumers are potential beneficiaries of the GST. The former, through ease of movement of goods across states, will benefit from improved logistics performance and scope for consolidating supply chains, and reduced transaction costs; and the latter, through reduced burden of tax translated eventually into reduced prices. Investors and manufacturing enterprises will find doing business to be tax neutral irrespective of its location anywhere in the country. Effectively, the GST will facilitate the creation of unhindered and predictable domestic commodity supply chains in India as also a unified market.
In the international context, the GST induced enhanced ease of doing business and logistics performance is better understood when viewed against the performance of a comparator country set. Of the 189 countries surveyed for the 2016 World Bank for Ease of Doing Business report, India ranked 130th. While this was an improvement of four ranks from India’s ranking from the previous year, there was no change in the rank for the constituent element of ‘trading across borders’ (that includes documentary compliance and domestic transport). It also shows a negative change or a fall from its 2015 ranking vis-a-vis the constituent element of ‘paying taxes’ (indicative of the overall tax environment of an economy that includes, among other aspects, the administrative burden in complying with the processes).
In the South Asian region, India has an overall rank of five among the region’s eight economies, and rank six and four respectively for the two constituent elements of ‘trading across borders’ and ‘paying taxes’. India has gained by 9.94 per cent with respect to its distance from frontier (measure of best practice), for procedures to start a business. And, the distance of 71.59 per cent in 2016 as against 61.65 per cent in 2015, is higher relative to the regional South Asian average.
However, of the 14 procedures that are required to start a business in India, as against an average of 7.9 in South Asia and 4.7 in OECD countries, the procedure for registering for VAT online, even though simultaneous with other procedures, takes ten days. As VAT (centre and state) gets subsumed in the GST and as tax implementation calls for a prior IT infrastructure to be in place, not only will the procedures get reduced in number, there will be a decline in time consumption as well.
Multiple taxes and procedures, differentiation across states and taxes makes compliance a complex task for domestic as well as external trade. With the introduction of the GST, almost all these procedural delays and encumbrances are likely to be eliminated, making India’s tax environment more conducive to business and India, a more attractive destination for investment with increased productive efficiency. Overall, the implementation of the GST will contribute to greater supply chain reliability, which is a critical input in a country’s global integration.
Reduced business costs and more efficient manufacturing supply chains can boost Indian exports that have over the past year experienced a downward growth trend. More importantly, the GST facilitated domestic market integration and supply chain predictability can be a major positive development for the ‘Make in India’ initiative. As international trade has slowed post the global financial crisis, logistics performance in the domestic context has acquired greater relevance than border issues in trade. The GST could thus be the innovative step forward for India in evolving its domestic supply chain in these critical times.
India’s domestic economic integration through the GST may also augur well for regional trade integration in South Asia. A more reliable domestic supply chain creates possibilities of India becoming the production and trade hub for South Asia. As South Asian economies struggle with the global growth slowdown and hence subdued demand for their exports, India could provide some succour by facilitating movement of goods within and across the South Asian region. The GST created unified Indian market could be a first step towards visualising the creation of a regional trade corridor.
Of course, the GST Bill creates only an enabling environment for the implementation of tax reform; and there remain political, administrative and infrastructure gaps that have to be appropriately filled for the transition to be complete. However, once this is accomplished, which, given the government’s announcement of a time schedule, is in all probability, likely to be in the next financial year, India will have a better chance of being integrated not just domestically but also in the regional and global economic context.
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