Disadvantages of GST Implementation in India

August 4, 2016

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The Indian parliament gave a unanimous decision on implementation of GST (Goods & Services Tax) in India from the coming financial year FY 17-18. Undoubtedly this move is historic in the history of Indian Economy. The passing of the GST bill is being seen the next big move after the 90s reforms of the Indian Economy. The government’s is already gearing up for timely implementation of the GST by strengthening the IT backbone which shall propel the decision ahead.

But at the same time there are few aspects with contradict the growth story and might be seen as hurdles which will take time to overcome post the implementation of GST. On one hand where a majority of corporate world is rejoicing, there are few who do not belong the happy lot.

When the aviation industry was witnessing the much awaited growth with increasing domestic traffic, the GST implementation might slower the rate at which the industry is expecting growth as flying will become expensive. Service tax on fares currently range between 6% and 9% (depending on the class of travel). With GST, the rate will surpass 15%, if not 18%, effectively doubling the tax rate.
India, on one hand, has the lowest insurance penetration in the world (less than 5% of Indian population & half of the global average) and on the other GST will further make the insurance products dearer. Life, health & motor insurances will begin to cost more from April 2017 as taxes will go up by up to 300 basis points.
IT companies have adopted a strategy of spreading their operations and stationing their majority workforce where the cost of operations in low (e.g. Chennai, Bangalore). The GST may lead to increasing costs of operations at their most cost-effective delivery centers.
The Banking & Financial Sector (including Insurance as stated above) might take a hit as ccurrently the effective tax rate in the sector is 14 per cent, which is levied only on fee component (and not interest) of the transaction. Under GST, effective tax rate on fee-based transactions is expected to increase to 18-20%. With the implementation of GST a moderate increase in the cost of financial services such as loan processing fees, debit/credit card charges, insurance premiums, etc. is expected.
Petroleum products form a majority import value in the Indian ecosystem. However, key petroleum products like crude, natural gas, high-speed diesel and ATF have been kept out of GST. Compliance costs are likely to rise because of dual indirect tax mechanism.

A seemless implementation of GST may boost growth of the overall economy to a level that the above stated pitfalls might be merely seem as part and parcel of the India growth story. E.g. When most of the sectors grow simultaneously, it might increase jobs and disposable income of individuals to an extent that the dearness brought by GST gets offset.

Analysts are already predicting 10% GDP growth for the Indian Economy with GST coming into effect. All eyes will be focussed on Q1 earnings of FY 2017-18 once the GST comes into effect and the companies start disclosing their numbers.