India’s move at the beginning of July to a unified, nationwide goods and services tax (GST), instead of a patchwork of state and central taxes, is smoothing cross-state logistics, but be wary of the impact on unregistered suppliers.
Much has been made of India’s move at the beginning of July to a unified, nationwide goods and services tax (GST) instead of a patchwork of state and central taxes.
The GST has, by and large, been implemented without too much disruption to the general economy. In fact, it’s had a clear positive effect on the movement of goods from one state to another.
Prior to the implementation of the GST, India functioned more like a federation of mini-nations when it came to logistics.
A good produced in the southern state of Tamil Nadu, for example, would be subject to myriad state taxes on the way to being delivered far north in Delhi. A good imported through the Jawaharlal Nehru Port Complex near Mumbai and trucked to Bangalore would be subject not only to customs duties, but individual taxes for every state that truck crossed.
It should be noted the GST has no impact on India’s customs and duties applicable on imported and exported goods (here’s a helpful breakdown of the GST brackets for shipments into and out of India.)
Aside from the financial imposition on shippers and their service providers, these state taxes created logistical headaches. Truckers would have to queue at state border crossings to pay the tax owed on the goods. The problem was compounded in metropolitan areas, where truck transits are often restricted to nighttime windows to avoid cargo clogging key highways.
So from a road freight transportation perspective, the GST has been a roaring success. India now functions like a single entity for freight, whether the cargo is purely domestic or import/export.
However, it’s impossible for such a massive change to a governmental system not to have some ripple effects. Some of those consequences are unintended, but many are, in fact, intended.
I recently spoke with a shopkeeper in central Delhi I know well about the impact of the GST. This person has run a family-owned sari boutique for decades, one of literally thousands of similar sari shops in India’s National Capital Region (NCR) alone.
This shop owner said the direct impact of the GST was fairly negligible for him. He buys the raw materials for his saris locally and the tax rate he has to pass on to customers was virtually the same as it had been when India operated under the more complicated state and central tax regime.
One of the key goals of the GST, from the Indian government’s perspective, was to get a better handle on the number of taxable entities in the country and to determine which of those entities was indeed paying income tax. In other words, the GST isn’t only about tax simplification and homogenization. It’s about highlighting the hundreds of thousands of taxable people and businesses that had previously been evading their income tax responsibility.
This point can’t be highlighted enough when it comes to understanding the ramifications of the GST for importers and exporters that work with Indian buyers and suppliers.
An endemic facet of Indian business culture is figuring out ways to evade taxation. Purchases made in cash are often sold at a lower rate than those made by credit card. Businesses transact in so-called “black” money, or stash black-money income in assets that are taxed at lower rates or not at all.
In many ways, the GST can be seen as a bookend to the currency replacement moves India made around the end of 2016 and early 2017, a drive to root out black money and to get more income generators on the tax rolls.
Here’s the critical point: every company in India must now have a GST identification number (GSTIN). See, for example, FedEx’s breakdown of GST requirements here. A similar tax identification number was required under the previous regime, but for whatever reason, hadn’t captured the entirety of India’s business community. The GSTIN is, in theory, no different from its predecessor. What’s the different is the emphasis behind it. The government is intent on bringing every company into the system, so that it can track every financial transaction. GST is not just a tax collection vehicle, it’s a tax compliance vehicle.
Let’s bring this back to our shopkeeper example. This person has regularly paid his taxes under the old regime, and long ago received his GSTIN. The problem, however, is that most of his suppliers don’t have their GSTIN, and many were unaware of the requirement to do get one. By his rough estimate, only 5 percent of the suppliers in his line of work were ready to comply with the GST.
That’s problematic for a shop like his, the end of a business-to-business chain that links directly to the customer. It’s not that GST is an imposition on his business or on sales of his goods, it’s that the GST stopped much of his production line dead in its tracks.
As a registered dealer, the shopkeeper is prohibited from working with the suppliers that aren’t registered with the GST network. These are the unintended consequences of significant policy change. A law-abiding shop is penalized because its suppliers haven’t complied with a new mandate.
The intended consequences of the GST were to force those suppliers to register, to come in to the light and stop transacting in unaccounted-for black money. But it’s become, in a sense, the obligation of registered companies to urge their network of partners and suppliers to come into the light as well.
This is, remember, an example of a domestic retailer dealing with local suppliers. But it’s not hard to think about the hurdles foreign buyers might face if they work with Indian suppliers. Are those suppliers registered with the GST? What about a distributor or consolidator? How is the foreign entity to know that they are registered, and if not, how would it compel those suppliers to do so?
On balance, the GST seems to be a net positive for the Indian economy. Logistics operations are still severely hampered by poor road infrastructure and the country is still troubled by systemic bureaucracy, but the GST is already having tangible benefits for the movement of goods across state borders. And it certainly simplifies the taxes owed on those movements.
But be mindful of the impact of GST on suppliers. It will take a long time for the millions of small businesses in India to reveal themselves under the harsh light of GST and its enforcement.
Commentary: Positives, negatives of GST
