Efficiency and broader tax base

CRISIL, an India-based credit rating agency, believes that industry stabilisation under the new tax regime will take a couple of quarters. However, the benefits of GST on business practices and company strategies will be seen only in the medium term. The extent of business efficiency is estimated to be higher in goods as compared to services.

At present, supply chains across major manufacturing industries are strategised based on the tax arbitrage aspect. Seamless tax treatment under GST will eliminate the need for multiple warehouses across states. Furthermore, companies will modify their supply chains based on the assessment of tax savings, inventory-carrying costs and response times to meet market demand.

The GST regime ensures that the tax base for indirect taxes grows through two ways. One, it sets up a system of taking credit for taxes on inputs only if they have been declared and paid by the input manufacturer. This sets up a system of self-policing as it is in the interest of the producer to ensure that he sources goods only from those suppliers who are tax-compliant. Many companies in the unorganised sector who are currently not paying tax are thus expected to fall within the tax net.

Investments in the economy will improve with a more seamless and efficient crediting of taxes paid on capital goods. Currently, companies sourcing capital goods for capacity expansion cannot claim tax credit on capital goods purchased; this will change with the GST regime. Capital goods prices are expected to become effectively 12-14 per cent cheaper as companies avail tax credit. This is likely to increase investments and help growth.