GST Bill: Need clarity on existing exemptions to auto sector

The passage of the Constitutional Amendment Bill in the Rajya Sabha enabling the rollout of a single goods and services tax for the entire country is a giant leap for the NDA government in introducing economic reforms equivalent to the dismantling the Licence Raj in the 1990s. It was a fitting finale to the decade-long process of turning it into a reality. Manufacturing will get more competitive due to the emergence of a national market as against the present fragmented one and will fulfil the Make In India aspiration.

The concept of "manufacturing states" will become history because potentially, India would become a single manufacturing nation. The decision to set up manufacturing units has depended on favourable taxation structures offered by states till date, but with GST it will be good governance at the state level which would decide where the manufacturing plant would be located. Indirectly, the country would see the advent of superior governance structures and increase the ease of doing business tremendously.

The efficiency of the road transport system would be enhanced because of a seamless flow of goods – both in terms of cost and time – as the carriers would not be required to face check-points at state borders, octroi booths, toll nakas, etc, as is the case now. Currently, these serve to be the notorious pockets of corruption and put the movement of goods from points of manufacturing to points of consumption into slow motion. Moreover, we all have experienced the high concentration of toxic fumes in the air that we get to breathe, with so many vehicles, with their engines running, blocked at one location. An indirect benefit of GST could be the reduction in fuel bill and pollution. Additionally, these current central and state level taxation structures lead to endless cost-draining litigations for companies that go on for years and are a source of big-time corruption. GST would put an end to all such corruption and litigation sagas.

With GST, the logistics, warehousing and inventory management for manufacturing firms would be better managed. The cost of distribution of goods would be reduced as some layers would be trimmed off. It would be particularly beneficial in bringing down the cost of consumer goods/consumables of every kind. It would benefit services too. For instance, the media and entertainment industry has to face both entertainment and service taxes, as of now. Once subsumed into one GST, the benefit should accrue to the end consumer. For our Group's media business, it would prove to be advantageous.

If we were to map the impact of GST introduction sector by sector, there would be some distinct positives for some and not-so-positive for others. For the Hinduja Group, being multi-sectoral, the overall impact would definitely be positive. Our flagship automotive company, Ashok Leyland, would definitely reap the advantage of lowered taxes which would be passed on to its customers. The commercial vehicle sector could witness a spur, and it would have a snowball effect on ancillaries as well as vehicle financing. Our lubricants business, Gulf Oil, stands to reap advantages, both, on account of increased sales of commercial vehicles, thereby higher consumption and also the lowered cost of its distribution would be a definite positive on the retail side of our lubricants business.

In banking and financial services streams like vehicle/home loan finance and pure play services-led businesses like BPOs etc, the higher incidence of resultant taxation could adversely affect fee-based incomes as they could get expensive in the short run. However, these would eventually even out. Full input tax credit under GST can lead to 12-14% drop in the cost of capital goods and this will boost investment. Increased protection from imports will be available as GST provides for appropriate countervailing duty. The low tax to GDP ratio of the country will go up helping the government to adhere to fiscal discipline and keep the inflation in check. Elimination of tax cascading is expected to place the economy on the growth trajectory of 8% and above with seamless flow of goods and services.

In order that prices may not rise to the determent of the interest of the common man, the GST rate should be kept at a reasonable level. States are reportedly pushing for a rate above 20% to minimise revenue losses and meet the development needs, a demand much more than 17-19% proposed by the panel headed by Chief Economic Advisor Arvind Subramanian. States and Centre should engage in talks to
work out the details and arrive at a tax rate which is not regressive. There should be uniform tax rate for goods across the states and uniform date of implementation. Clarity on the continuance of existing exemptions especially those linked to auto sector investments made both at the Centre and state levels is needed.

To mitigate the transition anxieties, the government has now outlined the roadmap for the legislative process for the proposed GST with an aim to pass central GST and laws in the winter session of the parliament and all state assemblies. What is more important is the training of over 60,000 central and state tax officials and putting in place IT backbone of GST, GSTN across the country. This will eliminate disputes arising out of determining the losses incurred by the States for being reimbursed by the states.

The benefits of GST are likely to be realised over two to three years and will structurally strengthen the Indian economy, improve the revenue of the government and revive the investment cycle.

The writer is chairman, Hinduja Group of Companies (India)