It is a historic development and a tremendous success for Prime Minister Modi’s government that it was finally able to secure the support of the opposition in both houses of Parliament for the introduction of a “Goods and Services Tax.” This tax, similar to our value-added tax, will not only simplify many processes in India but will also make India more competitive overall.
In addition to the direct, positive impact in India, this breakthrough also sends an important signal to international investors that the Modi government is continuing to work on implementing the announced reforms. This should not only provide new impetus for the “Make in India” campaign, but also calm skeptics who have begun to doubt Prime Minister Modi’s ability to implement the plans he presented upon taking office.
The chemical industry is one of the industries that is likely to benefit most from the introduction of GST, as it is an industry that operates few but capital-intensive manufacturing facilities and, in the next step, requires transporting the products to customers across India.
Even though the design of the new tax has not yet been fully finalized, it already seems clear that chemical companies in India will benefit significantly from the tax changes. Internal processes in companies’ finance departments will be simplified, as many of today’s indirect taxes will be incorporated into the Goods and Services Tax. Furthermore, the input tax deduction, which is common in India, will be implemented more consistently than is currently the case, which not only simplifies other processes but also reduces cumulative cost effects.
But far more important will be the direct cost savings that will result from the abolition of many local and regional indirect taxes. For example, in today’s complex tax system, a company manufacturing in Gujarat will supply customers in Tamil Nadu through a local warehouse to be more competitive. This not only avoids local sales tax but also allows the supplier to react more quickly, as the long truck transport times associated with the numerous tax inspections are anticipated.
Unfortunately, this setup also comes with costs, which ultimately have to be borne by the customer. The expense of local warehouses should not be underestimated, and especially when it comes to hazardous goods, suitable warehouses are not readily available. Furthermore, expertise and additional internal resources are required to manage the numerous local warehouses, which in turn entails additional costs.
With the introduction of the GST, the importance of local warehouses will drastically decline. Since the local sales tax will be integrated into the GST and the number of truck inspections will be drastically reduced, most of the arguments for local warehouses will no longer apply.
In summary, the Goods and Services Tax, assuming no significant changes to the yet-to-be-finalized design, is expected to bring significant cost benefits to chemical companies in India. The internal and external costs and complexity of managing numerous indirect taxes will largely be eliminated. Since the chemical industry typically operates across multiple value chains, these savings are cumulative, which should make local products significantly more competitive with imports. This positive development should also contribute to reversing the trend observed over the last decade, in which imports grew faster than local production for many chemical products.
Go East Advisors can help you capitalize on these positive developments. Whether you’re already active in India or just planning to enter, simply contact us and let us show you how you can optimize your presence in India in light of these new opportunities.
