As the biggest tax reform in decades takes shape, the country’s business world is transforming at a frantic pace. Here’s what to keep an eye on.
It’s the biggest tax reform the country has seen since independence 70 years ago. The new nationwide Goods and Services Tax (GST) replaces the myriad provincial tax regimes across India’s 29 states and 7 union territories with one unified tax system. GST came into force on June 1, 2017, and it’s going to transform the way we all do business there, including those of us in the logistics industry. In fact, we are already seeing companies taking major strategic actions. Allow me to explain why and what I think are the five key trends to keep an eye on as India irons out the wrinkles in this brand-new system.
For seven decades since India’s independence in 1947, indirect taxation was imposed by central, state (i.e. provincial), and even municipal governments. Companies that did business across provincial lines faced a plethora of taxes and a thicket of red tape. The cascading effect of taxes, i.e. taxes on taxes, increased costs, as did the effort needed to administer compliance with so many different tax systems. And moving goods from one place to another not only cost more, it also took more time due to checkpoints and toll plazas.
Going from this to a simplified and unified tax policy that institutes a nationwide free flow of goods and services is by itself a revolutionary transformation. But it is also accelerating India’s already rapid pace of change to levels I’d describe as frantic. Now add technology to the mix and your head starts spinning. All taxation-related compliance is moving online, which is ushering in new forms of businesses that were nonexistent even five years ago in India like app-based cab and delivery services and e-commerce marketplaces. Such change is not without its challenges. Indeed, we’ve seen teething troubles in the first weeks of GST as both the public and private sectors grapple to apply the new tax rules to different aspects of business operations.
To its credit, the government has responded well. But it was precisely this initial uncertainty that led to lower spending and inventory cuts, and there was a sharp drop in domestic transactions. With tax season on the horizon and the traditionally big bump in both business and consumer spending seen during India’s biggest festival, Diwali in the month of October, GST’s next test is right around the corner.
Most experts agree that GST will provide a much-needed stimulant for economic growth in India, removing barriers that some say made India’s states feel like different countries. As the new policy takes hold, here are five key trends to watch:
1. Redesigned logistics chains. It’s notoriously difficult to transport goods around India. We’ve sometimes joked that moving from one state to another felt like moving to another country. Supply chains and warehousing models were often based on tax efficiency to lower costs. GST changes everything. Companies can now make decisions about where to manufacture, warehouse and sell their products based on the real costs of producing those goods and getting them to market. These redesigned supply chains can minimize costs and inventories, while optimizing transit times. But that’s not all. Though we’ve seen a trend toward more modernized warehouses over the past decade, the reduced barriers under GST will likely lead to more efficient and multi-client warehouses that fully leverage economies of scale. This will allow more small and medium-sized enterprises (SMEs) to get into the game and grow their businesses. As B2C and B2B e-commerce continues grow, we’re going to see more optimized and flexible warehousing models alongside innovative order fulfillment and last-mile delivery solutions. Out on the road India’s largely unorganized trucking industry stands to make enormous efficiency gains as regulations become more transparent and crossing state borders becomes easier. With all this in mind, I expect to see major investments in logistics in the next few years.
2. Digitally driven industries and services. The single national tax will make it easier for online marketplaces and service aggregators to serve a large nationwide market. It will also make them more attractive to businesses looking to leverage the power of digitalization to market and sell their products as well as comply with tax regulations. For example, Uber can now offer nationwide car hiring services to large companies because it is much easier to issue invoices and provide the tax forms their clients need to satisfy the tax collectors – a nearly impossible task under the previous regime. We’re already seeing industries go digital. For example, new trucking service start-ups are providing digital platforms for thousands of small truck operators – one of the many new innovations in the logistics industry GST is ushering in.
3. E-governance. GST is also delivering digitalization to India’s public sector and leading the way to digital governance. The new system is moving taxation-compliance online, replacing physical manifests and state border-crossing permits with a new “e-waybill” and allowing electronic tax returns and tax credit claims. Another service that would have been impossible without a universal tax code. The new transparency is eye-opening and the cost savings is real, resulting in less overhead and more time to focus on your core business. This is going to make India a much easier and more inviting place to do business for outside investors, especially SMEs that in the past had found the Indian market complicated and downright daunting.
4. Foreign direct investment. Speaking of foreign investors, they are the next trend to keep on your radar screens. The new-found ability to better leverage economies of scale in India’s colossal (and growing!) consumer market is going to lead to greater inflows of foreign direct investment. Investors will want to take advantage of the new opportunities GST brings in order to tap into what some experts think will soon be the world’s third-largest consumer economy. The temptation to break into this market without having to set up nationwide operations with office and agents spread across the country will be too great. Remember that India has always been a consumer-driven growth economy, as opposed to China’s export-led growth. GST and digitalization is making it possible to reach consumers and businesses in the smallest Indian villages. We’re going to see a host of new industries as SMEs from Asia, Europe, North America and beyond vie for a piece of the pie.
5. SME integration into national supply chains. SMEs at home are poised to reap huge benefits as well. In the past, Indian SMEs have struggled to break out of their local markets due to tax arbitration and an inability to tap into larger supply chains. GST gives them a lot to look forward to. The barriers to entry are being washed away and soon they’ll be able to ride the wave and seek market opportunities across the whole country. The simplified national tax system and seamless state borders level the playing field, making them more competitive against the big players. We’re going to see more products from SMEs across the country as a result.
After years of debate, India’s Goods and Service Tax is here, and it’s nothing short of revolutionary. It is transforming the way we do business in the country and providing outstanding opportunities for many industries. Don’t be distracted by the wrinkles in this brand-new shirt, keep your eye on these trends and you’ll be a step ahead of the rest.