GST 2017

This is the post excerpt.

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The deeper conclusions…

The biggest tax reform of Indian Economy that will deform the entire market.

At a time when the entire country is more worried whether Modi Sarkar will be able to implement GST on 1st July or not, the more significant question that arises is “Have we actually looked into the nitti-gritties of it’s implementation and more importantly its impact on small players, different sectors and the employment scenario of the country”

Let us start with what people have not counted in.

  1. Rising Economic disparity: Earlier there was a limit of Rs.5 lakhs in annual sales for becoming liable to pay the sales tax in the form of VAT. GST quadruples this limit to Rs.20 lakhs.

Result 1: Loss in tax revenue for state.

Result 2: Increasing difference between a taxpayer and a non-tax payer. Suppose I am an online seller or a dealer who purchases out of state goods for selling, then I have to charge my customer a sales tax from Bill No.1, but a dealer who buys within the state and sells upto 20 lakhs in net turnover has to chill out and not charge any customer any tax nor does he have to bear the cost of GST compliance. As a small player you just killed my incentives of doing business.

  1. Influence on Pricing:
Costing (without GST)
Small Manufacturer Big Manufacturer

Variable Costs

80 75

Profit

20

20

Base Selling Price

100

95

Excise

0

11.742

VAT 13.125

12.46875

Total Amount to Customer 113.125

119.21075

Costing (with GST)
Small Manufacturer Big Manufacturer

Variable Costs

80 75

Profit

20

20

Base Selling Price

100

95

Excise

0

0

GST

13.125

12.46875

Total Amount to Customer 113.125

107.46875

Before the GST scenario, customers would buy from a big manufacturer only because of scale of operations even if price was bit high. Pricing was helpful to the small player to stay afloat in the market. But with the end of excise, the bigger player is in a better position to take advantage of the pricing too, thereby killing the scope for competition for the smaller player. This microeconomics in action will wipe off the smaller player from the market until factors like lead time and transportation costs compensate in the favour of the smaller player.

 

  1. Geographic Reshuffle

The supply chain and warehousing facilities will also change a lot. So far the policies like tax free zones had supported local development for remote areas, but now all industries who have a lot of import or export operations will try to shift their operations near the ports thereby putting an immense pressure on the infrastructure and eco system of such places. Overall the transportation costs will get optimised though but extent to which it will be done is far from significant since infrastructure setup costs are no less. Case in point is Baddi tax free zone whose revenue generation dropped to one-third since the end of exemptions. In eCommerce particularly, the GST will not optimise anything since a lot of transportation is scattered already and will stay scattered in future also. Cities are bound to be more overpopulated and their pathetic circumstances will be far from any noticeable improvements.

  1. Unemployment

Increased service taxes of upto 18% will cause a significant change in the cost structure of service based industries like hotels and restaurants, eCommerce, travel, communications. Increase in pricing will impact the demand and the overall sales and profits will drop. Employees will be forced to either take lesser wages or to leave the work. This will add to the burden of unemployment of the nation and the disparity between the rich and the poor will rise further. In an already slow economy post demonetisation, this will hit the socio economic balance of our society the hardest since 55% of our economy continues to be run by the services sector and any fiddling with it which can impact the demand in such a way that it goes to a lower side will be really horrible situation to be in.

  1. GST Compliance

So far I have discussed the impacts of GST on macro parameters. The real fight for anybody who is under its purview is even more troublesome. 37. Yes 3 monthly returns x 12 months + 1 Annual return amounts to 37 annual returns that need to be filed by any GST registered dealer. Does a dealer has enough time and sources to do that? Leave it I outsource this task to a service provider. Is he having ample sources to file your 37 returns annually?

Time to ponder over GST again.

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