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The brand value of GST

The brand value of GST
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First Published: Wed, Mar 24 2010. 09 53 PM IST
Updated: Wed, Mar 24 2010. 09 53 PM IST
The Indian government is moving towards introduction of a common goods and services tax (GST) next year. Not merely is this a breakthrough towards comprehensive indirect tax reform, it will usher in far-reaching changes for consumers and brands.
The first impact arises from integrating India into a single common market by enforcing a nationwide indirect tax rate. Inter-state barriers and distortions—thanks to differing value-added tax (VAT) rates across states and another set of levies such as the Central sales tax—will vanish, since GST subsumes all these taxes into a single composite levy.
This will create a seamless national market, one that presents lower costs. For instance, national marketeers will no longer require expensive intermediaries or stocking points in each state. We can therefore expect large national brands to gain in competitiveness at the expense of smaller ones, especially those in the unorganized sector, which have traditionally operated in a single state or region. At the same time, some of the stronger regional brands—capable of competing in this new nationwide market—may edge out other regional brands and find it easier to establish a national presence.
The second major change consumers and product marketeers can expect post-GST is a reduction in the burden of indirect taxes and, hence, a drop in prices of several branded products. In the proposed GST regime, the cascading effects of the Central VAT and the service tax, which manufacturers and product marketeers bear today, will be removed. In place, instead, will be a continuous series of set-offs from the producer to the retailer.
The government’s first discussion paper on GST specifically refers to this lower burden of taxes and consequent gains for common consumers. But we should note that consumers will obtain lower prices primarily from organized brands, which duly pay their taxes today. Brands in the unorganized sector, which evade taxes, will not benefit—and will, therefore, have no gains to pass on.
A third far-reaching consequence of GST has a similar basis and lies in the very nature of GST. As the report of the 13th Finance Commission summarizes, GST constitutes a tax that “sticks” on final consumption, with all stages of production and distribution being interpreted as mere pass-through. This will lead to far higher tax compliance, since every link in the value chain, including dealers and distributors, will require evidence of compliance by its preceding link to claim the required set-offs.
Therefore, GST is likely to sound a virtual death knell for the many unorganized manufacturers and traders who rely today on evasion of taxes for their very viability. In industries as diverse as tea, footwear and watches, these unorganized operators enjoy huge market shares exceeding 50%. Many of them offer relatively poor quality, yet compete illegitimately since, because they pay no taxes, they offer cheap prices. When GST takes away this unfair advantage in one swell swoop, organized brands, which are tax-compliant today, will benefit from the level playing field. Unorganized entities that wish to prosper will have to make efforts to transform their business models into legitimate and compliant entities competing for consumers the same way as the organized ones do. Only the best of these unorganized brands will then survive.
Either way, consumers will obtain better quality. As much as—or more than—it will help government coffers or companies, GST is going to benefit the ordinary consumer in every part of the country.
Harish Bhat is chief operating officer, watches, Titan Industries Ltd. These are his personal views. Comment at otherviews@livemint.com
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First Published: Wed, Mar 24 2010. 09 53 PM IST
More Topics: GST | VAT | Indirect tax | Views | OtherView |