Can GST Make the Wheels Rolling for India – A Detailed Analysis

Can GST Make the Wheels Rolling for India: Historically Indian subcontinent has always been known for its cultural and economic wealth. India was also blessed with so many important trade routes. However India’s contribution to world trade minimised to merely 2.8% whereas population wise its 1/6th of the world. Though India is World’s 7th largest economy by nominal GDP (as per world economic forum) and third-largest by purchasing power parity (PPP) but per capita wise India is placed at 141st position in the world.

Can GST Make the Wheels Rolling for India

Wheels are supposed to be the biggest engineering invention that made the life of mankind easier and facilitated the trade. Wheels are the single biggest reasons for ‘Comparative Advantage’. Comparative advantage means efficiency of one producer to produce goods and services at a lower opportunity cost than other producer. It’s possible only because wheels can carry these advantage from one corner of the world to other. But probably taxation laws and infrastructure bottlenecks of the country acted as breaks for Indian Economy among other factors

As per earlier law, in case of B-to-C transactions, sales tax (CST) was being collected by the state which exported the goods and to compensate the losses of tax, the importing states imposed entry tax. Whereas in case of B-to-B transactions, after keeping a portion of tax the exporter state transfers all the taxes to importing state with the help of Form C or Form F. Though to take the advantage of form-F the business organisation were forced to open branch offices/warehouses in every states resulting into increase in the cost. Moreover full credit of taxes paid in one state with taxes paid in other state was not possible in the C/F form regime. Ultimately all these cost were passed on to consumers.

Current position

Due to checking of road permit, C-Form, F-form etcat the state border check posts the trucks gets stranded most of the time resulting into increase in the transportation cost.As per Ministry of transport & highway’s document published,

  • A typical truck spends 20% of its run time at border check posts.
  • The average running speed of trucks in India is approximately 25 km/hr.
  • Transport industry spends 50-60% of its resources on tax compliances and deposit of inter-state sales tax.
  • Due to all these, average logistics cost is 14% of the price of goods whereas in developed economies it’s around 6 to 8% only.

Ideally rail should be cheaper mode of transport due to high carrying capacity [On an average a goods train can carry 4000 MT of goods whereas a truck can carry 12-18 MTs of goods only] butIndian railway’s share in transport sector is approximately 1/3rd(down from 60% in 1980).

India had 51300 km of rail lines in 1951 but today it has approximately 66000 km of rail lines only. Electrification started in 1951 when around 400 kms of rail line was electrified but today more than 2/3rd rail lines are still not electrified. Though India has done remarkable job in converting single lines into double lines. Road infrastructure is not rosy either. As on date India has approx. 50 lakh km of road length but state and central highways put together is 5% only. The current Govt has put special emphasis on strengthening of road and rail infrastructure, but the momentum need to be maintained.

How GST is going to help

India has introduced GST w.e.f. from 01.07.2017 all across the country. As per GST law, which is in true sense destination based taxation;

  • The state portion of tax will go the state where goods are going to be consumed.
  • Road permits has been abolished in all states due to which average speed of the trucks in the country has increased to 35-40 km per/hr.
  • Retention of a portion of state tax by the exporting state has been stopped.Seamless input credit of taxes are allowed resulting into reduction of the prices of the goods travelling from one state to another.
  • Taxes across all the states are same now providing opportunities for big organisations to sell their product across the country on the basis of comparative advantage only.

It has been predicted that these reasons, among others, will increase the Indian GDP by 1.5%-2%. Increase in GDP, reduction in logistics cost, removal of route permit, removal of C form/F-form will ensure growth in the transportation and logistics sector.

Area of concern post GST

In the new GST law, the point of taxation is Supply. A supply of goods or services made intra state is taxable if it is made between related persons or between principal to agent even if made without consideration. Further supply of goods or services inter-state is taxable in all cases whether with consideration or without consideration. That means any stock movement between related persons, principal to agent or interstate stock transfer are going to be taxable. Though the credit of such taxes will be available later on but liquidity to the extent of 18-40% of the value of goods will be blocked.

Further Govt has finalised E way fill to be implemented w.e.f. 1.10.2017. As per e-way rule, transportation of goods of value more than Rs 50,000 to generate e-way bill before its movement. The e-way bills will be valid for maximum 20 days depending on the distance to be travelled

  • one day for less than 100 km,
  • days for 100km to less than 300 km
  • 5 days for 300 km to less than 500 km
  • 10 days for 500km to less than 1,000 km.
  • 15 days for 1000 km or more (maximum day extended for 20 days).

Logistic industry fear that it will bring back old days of transportation. Industry say that 30 million parcels are transported every day and that would require 100 million e-way bill to be generated every day.

Conclusion

Now companies will refrain from unnecessary movement of the goods and also will not be forced to operate branches in every state for tax purposes. These two reasons will ensure that number of warehouses across the country will reduce. Bigger warehouse will be desirable at central places and transportation industry will require a different model than current hub and spoke model where cases of transhipment is more..

In the GST regime, reduction in number of warehouses and increasing the average speed of the trucks will reduce the demand of the trucks but reduction in the transportation cost and increase in the trade of goods across the country will counter balance.

GST will require redefining the supply chain management system. GST has provided us all the reasons to start the wheel rolling but we need good support of infrastructure and technology to keep the wheel rolling.

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