Uniformity of tax structures will open up market beyond favorable territories
Labor-intensive sectors have received a massive boost from GST and would lead from the front in creating new formal jobs
Through the recent passage of the 122nd Constitution Amendment Bill for GST (Goods and Services Tax) in the Rajya Sabha on 3rd August 2016, India has committed itself to replacing the various layers of indirect taxes on goods and services levied by the States and Center, and implement GST by April 2017.
Some of the salient features of GST are: (a) All forms of “supply” of goods and services made for a consideration shall attract CGST and SGST; (b) GST shall apply on “Supply” and all other earlier taxable heads such as “manufacture”, “sales” and “services” have been made redundant and irrelevant; (c) the liability shall arise only at the point of supply; (d) a single document for tax purposes and a single return filed with a central registry; (e) 7 Central Indirect Taxes & Levies and 9 State Indirect Taxes & Levies subsumed by GST hereby.
It’s the big bang reform in the Indian context aimed at creating a single, unified market that will benefit the corporates, the economy and the youth of the country.
Let’s look at the opportunity ahead of us:
- It is expected to make it easy for corporates to predict costs of products manufactured or services rendered across the country and improve enterprise productivity.
- For sectors that have been impacted positively (assuming a GST of 18%), they shall witness an increase in profitability through reduced average tax burden.
- Uniformity of tax structures opens up market beyond favorable territories. At the moment, the complex intra-state variances in tax structures have been a hindrance for many companies to look at nationwide reach.
- Expansion of services, capacity and product range on account of either increased profitability, predictability of costs as well as broadening of the market.
- Less protectionism amongst states and more innovation. The current structure tended to protect local manufacturers to the extent that they became less competitive and invested less in innovation, stunting their possible growth.
- Variablises current fixed costs through seeking input credit.
The sectors which are expected to immediately gain from the new bill are:
- FMCG – Huge savings to be registered for this segment on account of savings in logistics and distribution costs as there would be no need for having multiple sales depots. The savings or gains to their bottomline, one can safely assume, would be invested back into the business by way of introducing new product categories and penetrating deeper across the country. Hiring outlook is expected to improve significantly for this segment.
- Media – Their taxes are expected to go down by 2-4%, lowering their costs. With lower ticket costs, footfalls in theatres and entertainment spots are expected to go up. Film makers and studios for the first time stand to enjoy input credit as so far they were part of the negative list. This means more opportunities for the entertainment industry and as the sector being considerably manpower intensive would lead to newer jobs.
- Auto industry – Over the last couple of quarters, this sector has been fairing well and with about 8% drop in costs, it is expected to fuel more demand. Being a labor intensive sector, this augurs well for job creation.
- Cement – Infrastructure development has been a policy priority and with the positive impact of cement, it would be an added boost.
- Logistics – Probably one of the biggest winners from GST would be the logistics and distribution sector. The changes could reduce transportation cycle times, enhance supply chain decisions, lead to consolidation of warehouses, etc. which could help the logistics industry reach its potential in terms of service and growth. This sector over the last 2-3 years has created a significant number of job opportunities especially for youth who are lesser skilled and have fewer means to livelihood. The positive is expected to open up doors for more youth.
- Ecommerce – The unified market shall definitely lead to smooth movement of goods and products. Finally with elimination of the various layers of taxes, burden of which falls on customers, the ecommerce sector shall witness greater efficiency in costs. This sector has been the go to place for our youth seeking employment opportunities across all skill levels – this augurs well for sustained job creation.
In addition to this, one expects gains for mobile handset companies on account of lower distribution costs, lower product costs, which will spur demand. Elimination of multiple levies shall also help Digital Companies in making deeper forays. Overall, all sectors shall benefit from the streamlined process of filing returns given that there would be a single point of entry, lowered distribution and logistics costs, and increased predictability in costs structures.
Needless to say, to take advantage of the opportunities ahead of us, staff augmentation would be key and that would lead to massive formal job creation.
The five specific consequences of this event are:
- To explore new territories, to introduce new product range, there would be a need to hire and deploy a distributed workforce nationwide leading to a spike in new formal jobs.
- Demand for skilled manpower shall go up leading to an added emphasis on building skills across roles and functions.
- As one cannot seek input credit without ensuring there is evidence of GST being paid by partners, suppliers and vendors, it automatically weeds out informal players or forces them to comply paving way for mandatory formal job creation. In one stroke, laying down the systematic path towards fast paced formalization of our workforce.
- Labor intensive sectors have received a massive boost from GST and would be leading from the front in contributing to creating new formal jobs.
- GST creates a positive image in front of global investors making India a lucrative destination for them to set shops – thereby a ray of hope for our youth.
While it is premature to estimate sectoral additions in number of jobs, however, it is safe to assume that GST will create millions of jobs in the years to come. Let us take an example from e-commerce. In the state of UP wherein e-commerce companies were restricted to selling only goods up to Rs. 5000 lest the customer are dragged out of their houses to a tax office to complete complicated paper work, wherein a warehouse in Karnataka has been an unviable option on account of double taxation – all this goes away enabling possibility of higher sales in UP, greater efficiencies in Karnataka, lower cost and faster delivery – each of which can be actualized through the requisite manpower at the right places and in adequate numbers. One can predict that three biggest beneficiaries in the new jobs created would be those in sales, customer service and logistics amongst others.
The wait for GST to be passed has been long, albeit worth the patience and also is a symbol of how there are times when we need to look beyond our idealistic differences and do something that paves the way for a better future for our country and for our youth. For once, good economics scored over politics and cheers to that!