In a high-rate structure, the end-consumer could pay more since he/she doesn’t get offsets. The speed of offset credits is also vital. Indian business works on very thin margins and long credit lines. If tax offsets are slow, working capital costs will rise, maybe to a point where stress causes collapse of firms. Another problem is insane paperwork, with weekly reports and other filings, which will be a big barrier to doing business.
As said above, gains come from assumptions that goods will be transported more easily inter-state, cutting down logistics costs. But, state excise machinery will implement GST and state excise remains on items. So physical checkpoints won’t disappear. Long lines of trucks at state borders will continue to be a logistical nightmare even if inter-state tax rates equalise. In services, small businesses in design, advertising, software/hardware support, other repair and maintenance, etc, will find it hard to cope due to the paperwork blitz. An estimated 500,000 data entry operators will be required to run the GST system. The GST Network authority is opaque. So, we have no means of knowing how efficiently it will function or what error-correction mechanisms it has. Also, provisions like anti-profiteering allow, and perhaps encourage, officers to extort.
Given all this and sheer scale, things will be chaotic for a while. Any earnings and revenue projections are guesswork, with huge error margins, for at least two quarters. Projections on government revenue collections, including corporate tax, are also guesswork. Corporate tax is 32 per cent of all central tax revenues and more than excise and service tax combined. And, low profits mean lower taxes.
The unorganised sector doesn’t gets offsets and, therefore, becomes tax-inefficient. Most businesses have a mix of organised/unorganised elements in value chains. Over 80 per cent of employment is in the unorganised sector. The hit taken by this sector will inevitably affect the organised sector. Businesses will migrate from unorganised to organised and that’s good. But, it won’t be an orderly process and there will be job losses.
Analysts must wait and watch. If corporate earnings take a hit, and some sectors certainly will, investors must wait. Many kinks will have to be ironed out before the benefits of GST appear. The tax structure must rationalise; paperwork must reduce; the anti-profiteering clause will have to go. I haven’t seen any guesstimates on how long the system will take to settle. European GSTs averaged a couple of financial years. India has a much more complex tax structure and a less efficient bureaucracy. But, it probably has better information technology systems.
Analysts and investors tend to make linear or semi-linear earnings and revenue assumptions. Good businesses have predictability. But, a change as large as this in the commercial environment means such projections will be plain wrong. There is a big potential upside but there may be a big downside, too.