Implications of the GST implementation in India for the chemical industry (Excerpt from an Article in Chemical Today August 2017)

The implementation of GST on the 1st of July is a very important reform for India and it will benefit the chemical industry in a significant way.  This reform was long overdue, especially looking at the ambitions India has in becoming a global powerhouse in manufacturing with it Make in India initiative and not only wanting to be the leading service provider in the global IT industry. IWF is expecting an additional boost to the already well performing Indian economy. 

The benefits of this reform, especially in complex value chains like the one in the chemical industry, will be significant. Not only will the cascading effect of central and state levies, which could not be set off against each other, be avoided in most cases (exception is for example the Basic Customs Duty), but also logistics will be faster and distribution less costly because the number of local warehouses can be reduced and in the long run also border controls should disappear. Another new and important aspect is that under the GST regime cross utilization of input taxes paid on goods and services would be allowed, thereby leading to tax cost savings on this count. All together this means for the chemical industry that the cost basis will become more competitive and business processes can be made more efficient. Especially for products at the end of a longer chemical value chain the efficiency increases should be sizable because the multiple cost increases through the cascading tax effect and the addition of logistics and distribution cost disadvantages will disappear. 

The GST rates for chemicals are at reasonable levels with most products being in the 5, 12 and 18% bracket which is important as many products serve as intermediates in a longer value chain. This avoids or at least reduces the risk that companies at the end of the value chain will generate more tax credit than they would be able to use. Contrary to for example the German tax system reimbursements of tax credits are not foreseen under GST except for special cases.

Another important aspect of this reform is that the GST implementation will incentivize the unorganized sector to be part of main stream value chain. The new tax will require firms to upload their invoices every month to a portal that will match them with those of their suppliers or vendors. Because a tax number is needed for a firm to claim a credit on the cost of its inputs, many companies are refusing to buy from unregistered businesses. Those who don’t sign up risk losing any potential customer. This will for sure lead to a more compliant tax regime all over India. And it will also increase the number of tax payers and the tax income which is very important, as India currently has one of the worst tax-to-GDP ratios among major economies at 16.6%, less than half the 34 percent average for the members of the OECD and even below many emerging economies.

Even though the GST set-up also has some weaknesses, after 8 weeks it must be noticed that the implementation of this important tax reform was rather smooth. And it is sure that the new GST will make the Indian tax system less complex and the Indian manufacturing set-up more competitive. In a discussion about “Make or Import” it will certainly help to more often decide for “Make in India” and thus will strenghten the manufacturing base in India. If you speak to Indian entrepreneurs you can feel that there is a new optimism about the growth of the Indian industry. That means for companies who did not do yet take the decision to go to India and set up a manufacturing unit it is now the right time to benefit from the push the Indian economy got through this reform.

Our team from Go East Advisors is available to advise you on the right way to enter the market or expand your footprint in India. Just give us a call or send us a message and together with you we will work out the right way for your company to become succesful in India.