As both houses of Parliament convened for a joint session to launch the goods and services tax (GST), with Union finance minister Arun Jaitley’s speech reminiscent of Jawaharlal Nehru’s “India’s tryst with destiny", India heralded the onset of what is undoubtedly the biggest tax reform in its history. Truly, this is another tryst with destiny—one of the most ambitious economic reforms in India since independence—one which has the ability to realign the entire landscape of the country.

For far too long, we have been witness to a maze of taxes and tax laws that have often even left the authorities befuddled. The dream of “One Nation, One Tax, One Market" is now finally a reality and the government deserves applause for deftly negotiating the roadblocks and pushing this through. From a business point of view, an integrated India is a huge positive for everyone involved—be it the Centre, the state governments, or businesses.

How does GST help?

By removing the tax barriers across states, GST has created a single common market across the nation. The existing interstate tax mechanism was somewhat broken—GST will ensure free flow of goods across states. The lower logistics costs due to the decline in transit time will be driven by the elimination of multiple check-points and consolidation of warehouses. This could significantly reduce delays and hold-ups, leading to a marked change in productivity in the economy.

Even more importantly, GST will play a huge role in the formalization of the economy. The unique ID-based tracking of goods by the GST Network (GSTN) throughout any product’s value chain will ensure higher compliance under GST. This will reduce the tax arbitrage enjoyed currently by unorganized players and facilitate the shift from the unorganized to the organized sector. By some estimates, in the long run GST could add 1.5-2% to the gross domestic product (GDP).

As a tax reform, GST will help significantly reduce the complexity associated with our current tax mechanism, which is plagued by a multiplicity of taxes, rendering the current system highly inefficient. This will have twofold benefits.

First, uniform taxation under GST will improve the competitiveness of domestic manufacturing and provide a boost to the “Make in India" initiative. It will also help improve India’s ranking in the “Ease of Doing Business" index, which has been a core focus area for the government in recent times.

Second, it will drive higher tax compliance. India’s tax-to-GDP ratio currently stands at 17% against an average of 34% in Organization for Economic Co-operation and Development (OECD) countries. GST will ensure higher tax compliance on both the direct and indirect tax fronts.

Is there any cause for concern?

An oft-repeated complaint about GST has been the potential inflationary impact it could have on the economy. However, by iterating on tax rates for all goods multiple times, keeping the interests of various stakeholders in mind, the government has ensured that tax incidence under GST has been largely maintained at existing levels for most sectors, barring a few exceptions. GST will also not have any material impact on the consumer price index (CPI) as about 50% of the CPI basket is out of GST and, for the remaining goods, the impact of inflation is expected to be broadly neutral.

Concerns also abound on the impact on the short-term profitability of companies. Due to the lack of clarity and uncertainty over availability of input tax credit, trade channels had started liquidating inventory before the GST roll-out. This could have an impact on the top line and bottom line over the next one or two quarters, coupled with rising manpower and compliance costs which could disrupt business and affect cash flows. However, the question here is whether this short-term disruption is worth the long-term benefits. Yes, there will be some short-term impact—with a mega reform of this size, it is inevitable. However, the incremental benefits for these businesses in the long term, in the form of increased productivity and easier tax compliance, will far outweigh any short-term challenges.

What does it all mean?

It is often said that change can be scary but what is scarier is allowing the fear of change to stop you from growing and progressing. The government has done a commendable job in handling the operational challenges associated with GST. However, there are bound to be teething troubles. The short-term adjustments as the system realigns to a new normal will slow things down for the next three-six months. There will definitely be more roadblocks and challenges—and the government will continue to proactively act on these.

GST can be a game changer for the economy. The incremental benefit that it entails far outweighs any of these short-term disruptions. The many advantages it will create for the economy will have an impact on a wide spectrum ranging from tax compliance to GDP growth. As businesses adjust to the new normal, GST has the potential to transform the landscape of the country, creating a unified India for business, and establishing a new paradigm in the way business is done in the country.

Rashesh Shah is chairman and chief executive officer, Edelweiss Group.

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