11 Aug 16 GST bill: A long hard road ahead

Finally, after a decade of politicking and delays, the GST bill was finally passed in Parliament. Many commentators have proclaimed this as the biggest reform move by the Modi government. While that may or may not be true, it has definitely restored our belief that Parliament can work if it chooses to.

The potential benefits are huge – and lots has been written about the single economy,  reduced points of taxation, ease of doing business, reduced logistics costs and many other benefits of GST.

However, the passing of the bill is only the start. States still have to ratify the bill and we can expect some drama there. Rates of tax have not yet been decided, and very high rates could be a dampener.  After all that, we will come to the fine print and the evolution of an institutionalized GST council. Surely, we can expect a few hiccups and unpleasant surprises on the way.

Finally, there is the actual implementation, whether it is April 2017 or later. The initial period is likely to be chaotic, as companies (and governments) figure out how much each one needs to pay, what kind of paper-work is needed, etc. It’s impossible that an exercise of this magnitude will be executed without any glitches. There will be plenty along the way, and only lawyers and accountants will be short term winners.

Further, there will be pain for specific businesses or industries. In some cases, tax movements might adversely affect demand, even as others benefit. For instance experts believe that larger cars will benefit versus small cars, if both pay the same tax. Some in the logistics industry will gain from larger centralized warehousing, but others might lose from the ensuing consolidation. Service tax should increase substantially, and demand for certain services might be hit. Companies may have to re-jig their entire strategy, and value chain – so there’s a lot of work to be done, even for potential winners.

At this point, without knowing the rates or the nature of fine print, it is difficult to say who will gain or lose in the near term. But it is clear that along with the winners, there will be many losers. Sure – the economy overall will become more efficient, investment will grow, and net benefits will be substantially positive.

However, the benefits are unlikely to come in a hurry. The liberalization efforts of Narasimha Rao were initially met by euphoria, but post 1995, we had several extremely difficult years. Industry had to deal with a previously unknown level of competition from cheaper imports and new domestic capacity. Many companies did not survive the turmoil, even as others emerged stronger than before. But all this took several years to play out.

The GST journey will not be as arduous as the adjustment to de-licensing and lower tariffs in the nineties, but don’t expect it to be a cakewalk either. Major structural reforms can and will create some disruption (and lot of confusion) – and significant benefits will be evident only in the long run.