That the government was finally able to win support for the GST legislation in the upper house of parliament and get all the amendments of the bill also passed in Lok Sabha is a big achievement for Prime Minister Modi. This important milestone of his plan to improve the “Ease of doing business” in India will not only simplify the way how to do business in India but it will also increase the competitiveness of the Indian economy.
Besides the direct positive impact in India it is also an important message to investors around the world that the government is still serious about the reform agenda. This is especially important as over the last months doubts were raised if the Modi government would be able to fulfil promises it made while taking office. With this achievement the “Make in India” campaign also could get a new boost.
The chemical industry in India is one of the industries which will benefit most of the GST implementation as it is typically an industry which has few, capital intensive manufacturing locations and subsequently a lot of logistical activities which follow the actual production steps and which are necessary to reach the customers who are normally spread out all over India. A benefit for the whole economy and also for the chemical industry is, that if the GST set-up is done in an efficient way comparable to countries like Germany, it will also be avoided that cumulative cost effects influence the value chain and make production set-ups in India less competitive.
Even if the final design of the GST is not yet 100% decided it seems to be clear that for the chemical industry on a company level the positive effects of the GST introduction are significant. First of all the internal efforts to manage the business and the work in the finance departments will be reduced as many of the numerous indirect taxes will be integrated into GST. In addition GST linked to purchased products and services and GST charged to the customers can be counterbalanced which also results in internal processes becoming much easier.
But more importantly also direct savings can be realized. In todays complex indirect tax legislation a company, which for example produces chemicals in Gujarat and sells these products in Tamil Nadu tries to stay competitive by setting up a warehouse in Tamil Nadu to cater to the local customers. By doing a stock transfer from its production location to its sales warehouse the company will not only avoid the central sales tax and can thus price the products lower it will also be able to supply customers faster as it prepones the long transportation times which are due to multiple truck checking points.
But also this kind of set-up is not free for the company and nor, eventually for the customer. The cost for setting up and running the local warehouse is not small and especially if a company is producing hazardous chemicals, suitable warehouse locations are sometimes difficult to find. In addition the internal complexity to manage this kind of set-up for multiple locations requires expertise and manpower and thus stands for additional cost.
With introduction of GST the requirements for setting up warehouses in different Indian states will disappear for most chemical businesses in India. With the upcoming integration of CST into GST one of the major needs for the warehouse set up is not any longer existent. And depending on the final design of GST and as a result on how far finally the trucks will be able to circulate without being stopped also the just in time delivery will be possible over longer distances and so also this argument for local warehouses disappears.
In summary it means that the introduction of a well designed GST will be very beneficial for the chemical companies in India as the external and internal cost and the complexity of managing the numerous indirect taxes will be reduced and sales prices will be more attractive compared to imports. Knowing that chemical products often are intermediates to other chemicals this effect is cumulative and therefore the Indian chemical industry will be significantly more competitive after introduction of GST. This positive perspective might also help to reverse the trend seen in the last decade in many chemical segments that imports grew faster than local production.
Go East Advisors can help you to benefit from this historical change in the Indian tax system. Please talk to us if you would like to get your business started in India right now or if you would like to optimise your existing set-up. We will advise you on how to adjust your business to the higher prospects of the Indian market.