The introduction of the Goods and Services Tax (GST) on July 1st was a significant reform for India and will also bring significant benefits to the chemical industry. This reform was long overdue, especially considering India’s ambitions with its “Make in India” initiative to become a global player in the manufacturing sector and not just a leading provider in IT services. The IMF therefore predicts a further acceleration of the already strong economy.
The advantages of this reform should not be underestimated, especially for complex value chains such as those in the chemical industry. Not only will the cumulative effects of the various federal and central government taxes, which previously could not be offset against each other, disappear in most cases (one exception is the Basic Customs Duty), but logistics will also become faster and distribution costs will decrease, as the number of local warehouses can be reduced and, in the long term, border controls between states will also disappear. Another new and important aspect is that the GST legislation will allow the offsetting of service and goods taxes, which will lead to further cost savings. All of this together will make the cost base in the chemical industry in India more competitive and enable business processes to be made more efficient. The savings will be particularly significant for products at the end of the value chain, as the cumulative tax effects and the logistics and distribution cost disadvantages have been eliminated.
The GST tax rates are sensibly set and are 5, 12, or 18% for most products, which is important in the new reform, as most products are used as intermediates in longer value chains, and unlike in Germany, for example, tax refunds are not provided for in the GST system. This means that it is important not to receive more tax credits than one can use.
Another important aspect of this tax reform is that it will motivate the unorganized sector to join the official system and pay taxes. In the new GST system, all companies must register their invoices monthly on a portal, which aligns these with the corresponding tax payments of suppliers or customers. In order to receive an input tax credit, for example, the relevant supplier must be registered. This will result in most companies only working with partners who have a GST tax number, which will certainly lead to significantly higher tax compliance and more tax revenue for the state. This is urgently needed, as India has one of the worst tax-to-GDP ratios at 16.6%, which is less than half the average among OECD members and also significantly below that of other developing countries.
Even though the GST legislation has some weaknesses, eight weeks after its official launch, it must be said that implementation has worked relatively well. The new GST will certainly make the Indian tax system less complex and make production locations in India significantly more competitive. In a discussion about whether to produce locally or import, foreign companies in particular will therefore more often opt for “Make in India.” If you talk to Indian entrepreneurs since the introduction of GST, you can sense the new optimism about the development of the Indian market. For European companies that have not yet ventured into their own production, now is certainly the right time to benefit from the boost of the Indian economy by setting up a local business.
Our team at Go East Advisors is available to support you with your market entry or expansion. We would be happy to work with you to develop and implement the right path to successful business development in India.
