Existing economic initiatives, such as “Make in India”, are getting a boost from the new tax regime, at least for the most part
More than eight months have passed since the introduction of India’s Goods and Services Tax (GST), are form intended to revamp the entire taxation system and stimulate economic growth. What’s more, existing economic initiatives, such as “Make in India”, are getting a boost from the new tax regime, at least for the most part.
What exactly is the “Make in India” initiative?
Prime Minister Narendra Modi launched “Make in India” on Sept. 25, 2014, with the primary goal of making India a global manufacturing hub by encouraging both multinational and domestic companies to design and manufacture products within the country. The initiative takes aim at increasing production capacity, stimulating job creation, and attracting foreign direct investment (FDI) as well.
While the initiative has been successful in positioning India as a global investment destination, FDI surged even more with the introduction of GST, increasing FDI by more than 40 percent. Other aspects, both positive and negative, of the interplay between “Make in India” and GST are also coming to light. Let’s take a look.
Balanced payment positions
One of the most pronounced changes to come with GST is the shift to destination-based taxation. This change has three impacts on the “Make in India” initiative.
A) Imports: The first is that all imported goods and services are charged with an integrated tax (IGST), which is equivalent to central GST and state GST combined together, as they effectively flow into an Indian state. This brings parity in taxation on local and imported products, meaning that Indian-made goods are better able to compete with imports.
B) Intrastate transactions: The fact that cross-state integrated tax (IGST) is the same as central and state GST for intrastate transactions also remove barriers for state-to-state commerce. Prior to GST, the tax implications of making something in one state and selling it in another were as daunting as buying from out of country. By normalizing taxes within and between states, the new tax regime makes Indian companies much more likely to purchase from one another, regardless of in what state the supplier resides.
C) Exports: The most significant impact of destination-based taxation is that, under GST, exports are zero-rated, given they are not consumed within an Indian state. This has been instrumental in boosting Indian exports in the international market. There are also mechanisms built into the system toreward exporters possessing a clean taxation record with an immediate refund amounting to 90 percent of their claims. There have been some difficulties in this regard, but more on that later.
Reduced production costs
Due to the uniformity in tax structure and the seamless flow of input tax credit for both input goods and services, production costs are lower now than under the previous tax regime. Reducing production costs positively impacts the manufacturing hub and is bound to increase manufacturing sector profits in the long run. Further, GST has inspired more innovative production and opened up new markets, increasing production capacity and job creation across the nation. The “one nation, one tax” concept has effectively made geographical boundaries irrelevant.
Free flow of goods
As mentioned above, GST has been successful in removing economic barriers and has paved the way for an integrated economy at the national level, which has also benefitted the logistics sector. Previously, trucks moving from one part of the country to another spent considerable time at border checkpoints waiting for documents to be reviewed and cleared.
Efficiencies in logistics have reduced this time significantly, benefitting the manufacturing sector and, thereby, the “Make in India” initiative. Improvements in infrastructure are expected to bring additional benefits in time.
GST has further increased demand in various sectors such as tyre manufacturing industry as companies previously in a wait-and-watch mode have switched to execution mode. This increase in demand will trigger an increase in production in years to come.
India’s GST has not been without its growing pains. One of the most significant hindrance to the success of the “Make in India” campaign has been delays in export tax refund payments. Most taxpayers are required to pay GST at the border in the form of customs duties, then request refunds of those taxes.
However, mechanisms to accomplish this have been late to come and complex for taxpayers to follow. Many exporters are reeling from cash crunches while waiting for pending GST refunds. These exporters have been among the worst affected due to various issues with required documentation in the absence of checklists, and this has negatively affected the “Make in India” initiative.
Some experts also believe that frequent shifts in policies are not sitting well with industry and could ultimately hamper the country’s financial rating. One recent example occurred within the automobile industry. The government approved a bill to raise the maximum cess levied on luxury cars from 15 to 25 percent in order to generate funds to compensate states for revenue loss due to GST implementation. Industry sharply criticised the move, and the country’s largest luxury car maker, Mercedes-Benz, even cancelled its plan to expand under the “Make in India” initiative.
In other areas, GST, coupled with “Make in India” and “Skill India”, is having the opposite effect. In particular, the tax reform and economic initiatives have ushered in a new era for start-ups in the country. Last year, India secured a place among the top 100 countries for ease of doing business — moving from position 130 to position 100, the highest jump any country has ever made.
However, as a whole, GST is still a work in progress. It is likely that, with time, the dust surrounding GST will settle, and it will prove to be the icing on the cake for “Make in India” and other initiatives designed to stimulate the economy.
source : http://businessworld.in/article/GST-And-Make-In-India-A-Win-Win-For-The-Entire-Nation-/09-04-2018-145857/