Updated: 22nd May 2018
The Indian parliament rolled out the Goods & Services Tax (GST) in India from July 2017. Undoubtedly this move is historic in the history of Indian Economy. The passing of the GST bill is being seen the next big move after the 90s reforms of the Indian Economy. The government’s is already gearing up for timely implementation of the GST by strengthening the IT backbone which shall propel the decision ahead.
But at the same time there are few aspects with contradict the growth story and might be seen as hurdles which will take time to overcome post the implementation of GST. On one hand where a majority of corporate world is rejoicing, there are few who do not belong the happy lot.
On one hand government is pushing every citizen of the country to open a bank account and on the other hand GST has made financial services expensive. Transactions fees in financial services are likely to become more expensive after the government has put these under the 18% tax bracket in the new goods and services tax (GST) regime.
These services were so far taxed at 15% and the hike in the tax rate means that individuals will have to pay Rs 3 more for every Rs 100 paid for banking transactions.(Economic Times : You will have to shell out more for banking transactions from July)
Indian Aviation Industry has been favoured with domestic travel getting cheaper. But India’s key airports are already struggling to keep up with the capacity (Govt working on increasing IGI airport’s capacity by 50%). Cheaper travel will further fuel the air traffic and burdening the airports which might lead to operational glitches and increases safety concern. Union minister of state for civil aviation Jayant Sinha admitted that Indira Gandhi International (IGI) Airport’s Terminal 1 was handling passengers more than it could, said immediate and long-term measure need to be undertaken to increase air side and terminal capacity.
India is amongst the most under penetrated Insurance market (less than 10% population of India has Insurance). This was the reason for the government launching the ‘Pradhan Matri Jeevan Beema Yojna’. However, with GST roll out insurance premiums have become more expensive which can be a temporary roadblock in a price sensitive market like India. Life, health & motor insurances will begin to cost more from July 2017 as taxes will go up by up to 300 basis points.
The telecom sector is already under sever debt and burden of liscence fee. The current debt stands at around Rs 4 lakh crore (Telecom debt unsustainable – TOI). With GCT the taxes on telecom services will further increase.
On one hand, government is talking about Digital India and on the other telecom services (phone, broadband etc-) is getting costlier as most of the operators will pass on the increase to the consumers. Thereby, contradicting the Digital India initiative.
IT companies have adopted a strategy of spreading their operations and stationing their majority workforce where the cost of operations in low (e.g. Chennai, Bangalore). The GST may lead to increasing costs of operations at their most cost-effective delivery centers.
The Banking & Financial Sector (including Insurance as stated above) might take a hit as currently the effective tax rate in the sector is 14 per cent, which is levied only on fee component (and not interest) of the transaction. Under GST, effective tax rate on fee-based transactions is expected to increase to 18-20%. With the implementation of GST a moderate increase in the cost of financial services such as loan processing fees, debit/credit card charges, insurance premiums, etc. is expected.
Petroleum products form a majority import value in the Indian ecosystem. However, key petroleum products like crude, natural gas, high-speed diesel and ATF have been kept out of GST. Compliance costs are likely to rise because of dual indirect tax mechanism.
A seemless implementation of GST may boost growth of the overall economy to a level that the above stated pitfalls might be merely seem as part and parcel of the India growth story. E.g. When most of the sectors grow simultaneously, it might increase jobs and disposable income of individuals to an extent that the dearness brought by GST gets offset. Analysts are already predicting 10% GDP growth for the Indian Economy with GST coming into effect. All eyes will be focussed on Q2 earnings of FY 2017-18 once the GST comes into effect and the companies start disclosing their numbers.