NEW DELHI — In one of the biggest reforms in 60 years, an agreement in both houses of Parliament last week has set the stage for a change in India’s tax regime. The goods and service taxn or GST, which has been debated for almost a decade, is expected to unify the country into a common market with one tax across all states.
The GST is expected to replace 17 indirect tax levies, bringing down compliance costs for businesses and reducing market fragmentation. Logistics and inventory costs are expected to fall as well.
Finance minister Arun Jaitley said the rollout of the GST is planned from July 1. With this, central government taxes — including central excise duty, additional excise duty, additional customs duty and service tax — will all be merged into a single national GST. Other state-level taxes such as value added taxes, purchase taxes, luxury taxes and entry taxes, will all be combined into one state-level GST.
Kumar Rajagopalan, chief executive officer of the Retailers Association of India, said the move would have a major impact on the retail sector.
“GST has been discussed for quite some time in India and the retail industry has been eagerly anticipating its implementation,” he said. “GST will create an easier tax regime despite the short time available and operational hurdles — there are definitely a lot of operational issues to sort out. The officials in the government have had an open discussion with various members of the Retailers Association of India and we believe that many of these would be ironed out.”
The new regime will have four levels: 5 percent, 12 percent, 18 percent and 28 percent, with a cap of 40 percent. One of the key pending issues is the amount of tax to be levied on different product categories, which will only be decided by the GST Council on May 17 and 18.
“We are hoping that the apparel category is taxed at a low tax-tier level to ensure affordability for consumers in India. The garment sector in the country is a sensitive one, with apparel being one of the core consumption items,” Rajagoplan said.
Although analysts agree that the more seamless tax structure will make it easier to do business, the preparation for the changes in the $650 billion retail industry will have to be made carefully in coming weeks.
A slew of seminars, information sessions by the government and by accountants have been lined up this month, before the trial GST run to be launched by the government in the first week of May. Meanwhile, 15 of the 29 states will have to ratify the agreement for it to go into effect, which government officials are confident will happen.
The changes will also be beneficial for global brands and retailers, analysts said, making the current complex tax systems across India easier to navigate.
Lord Waheed Alli, executive chairman of fashion etailer Koovs and earlier chairman of U.K. fashion site Asos for more than a decade, told WWD, “This is a sign of economic movement. It is a big thing. I look at some of these changes and say, ‘Wow, I can’t believe they managed to do that.’ If you had told me 10 years ago that India would tackle demonetization and the cash culture to handle corruption, if you said they would do a consolidated tax, and make those tax returns electronic, I don’t think I would have believed you. Now that it’s happening…somebody give credit — say it is amazing. This is not just one political party that has done it — they have done it together. That’s the incredible thing about it.”
He said the GST would “simplify things” for e-commerce players and reduce paperwork. “We’re small — it will make things easier for us. But it will make a huge difference for bigger players. When we get big, we will be glad that barrier’s gone,” he said.
Retailers generally are taking stock of the situation and reassessing the market.
“There are still many grey areas in this,” observed Darshan Mehta, ceo and president of Reliance Brands, which has brought in more than a dozen global brands into India. “What the government has very cleverly — or uncleverly — done is that the entire focus has been on getting the necessary legal framework clearance at different levels. They have not focused at all on the trade or the business side. They have been basically arming themselves with necessary approvals to make this happen. It could be very positive or very negative.
“My worry is different. Clothing is very generic, they cannot set it at 18 percent because clothing is an essential part of your basket of purchase. Today you are paying five and a half percent sales tax as a customer. If this becomes 18 percent there will be massive amounts of inflation in the country. So, chances are it will be 5 or 12 percent. The lobby is pushing a lot for 5 percent. The way the statute is structured, expensive clothing will not have a separate slab [level]. It will play to the least common denominator. This could play to the benefit of foreign brands immediately. Because the countervailing duties will get subsumed by the GST and the basic custom duty is 10 percent.
“But in reality, will the government allow foreigners to come into the market with only 10 percent? if you look beyond the obvious, at the undertones, if you are not creating jobs in India — one way or another you will be strapped with very high tariffs, by whatever name you call it. The whole ‘make in India’ campaign is important,” he said, adding, “I’m not overly optimistic about this, but nor am I pessimistic.”
Meanwhile the practical aspects of the road ahead are already being taken into account.
As retailers start gearing up for the changing Indian market, part of the retraining and thought processes before July 1 are about realigning warehousing and supply chain requirements of companies, said K. Ravichandran, senior vice president of ICRA Limited, an Indian independent and professional investment information and credit rating agency.
Analysts also warn that although retailers in general have welcomed the GST, there could be an initial dip in consumption, depending on the final tax levels that are adopted by the government. HSBC Global Research noted that “the near-term could be messy, with adjustment costs as the private sector grapples with new tax rates and central government tries to compensate states for lost revenue.”