GST a significant move, but implementation is key: India Inc

He believes that the revenue neutral rate will be low.

Vineet Agarwal, MD of Transport Corporation of India, said that GST could lead to a reduction of 5 percent in overall logistics costs.

Sunil Munjal, Joint Managing Director of Hero MotoCorp, said that more than 160 countries have switched to GST. He said there won’t be a near-term impact as the Central government has promised to compensate the states’ losses for five years. “I think a lot of states feel safer in switching over,” he said.

"I will say that this is a very significant step forward for all enterprises," he said.Below is the verbatim transcript of RC Bhargava, Adi Godrej, Vineet Agarwal & Sunil Munjal’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: You have seen several decades of promises of revolution, is this really one?Bhargava: Certainly, it is something we have all been waiting for a long time. Of course, it is an enabling piece of legislation, but it was a roadblock which prevented anything happening further. So, once this gets passed, hopefully today, then I think we can go ahead and hope that all the other steps will be taken.However, along with that the focus also needs now to be kept more on the implementational machinery for goods and service tax (GST) because legislation on paper will be no good without a very effective system for enforcing the GST system.Sonia: For a sector like autos, it will be a big relief. Currently the auto sector has a tax burden of about 22-24 percent and that will be brought dramatically. What about a sector like fast-moving consumer goods (FMCG), how much of a relief do you think the GST could bring about?Godrej: The GST will be an extremely good economic development for the country. It has been grossly under estimated in the country. So, first of all, it will add 1.50 to 2 percentage points to the gross domestic product (GDP) growth of the country. It will start almost immediately from the April 1st, higher growth rate for the country. The reason being indirect tax evasion will almost come to an end because under the GST regime, it is not possible to evade taxes and get away with it.The other very important factor to my mind is a lot of direct tax evasion in our country is because of indirect tax evasion. Once indirect tax evasion comes to a very low level, direct tax evasion will also come along. Government revenues could rise and in the long-term government could reduce the rates of the GST quite considerably.However, immediately there will be a relief of around 5 percentage points on taxation on FMCG. It will be similar on almost all goods that go directly to consumers. So, there will be a tremendous benefit. Consumption will go up, production will go up, investment into production will go up, so this is a great development. To my mind it is the biggest economic reform after the liberalisation of 1991.Latha: As you pointed out, for those of you in perhaps, the auto sector or even the fast-moving consumer goods (FMCG) sector who have been used to a 22 percent tax and 18 percent tax will be very welcome, but there are services like telecom or banking services, which are now taxed much lower and they could get taxed higher. So, do you think for the economy as a whole, there is initially a fear of higher inflation? After all, we are more services economy than a goods economy, so an initial hiccup possible in 2017?Godrej: No, we must remember that we are a much bigger services economy than a goods economy. But, most services are taxed on goods. For example, goods bear the tax on retailing, on transport, on logistics, etc, which are the services in the country. Of course, there will be a little higher cost on things like health services, educational services, perhaps telecom, etc but the large bulk of consumer expenditure will face lower taxes.Latha: Is evasion avoided? We have been, as a country, singularly capable and savvy about dodging taxes. Is it possible that entire chains of inputs to output side-steps the tax man?Bhargava: Certainly, as Adi Godrej said, the GST system should lead to minimal -- if not total -- avoidance of evasion of taxes. But, as I said, the ability to control evasion will also depend on the IT system and the effectiveness with which it is implemented because our people are very adept at trying to find loopholes and ways of hacking into systems and changing things. So, we need a very effective enforcement machinery.Along with that, I must mention that I am not sure that the taxes on the automobiles will come down by 4-5 percent because the system of levy of GST, as I understand it, is going to be on the consumer price which is at the showroom of the dealer. Today, excise duties are charged at the ex-factory price. So, the base on which the tax will be levied will change. So, whether that leads to a lowering of tax or not, will only be known once we know the details of how the taxes will be calculated.Sonia: We all know that there are supply chain benefits that the logistics sector could see, there is higher amount of traffic etc but drill it down to numbers for us. In the very near-term, over the next two years, what kind of an impact do you see?Agarwal: One of the things that we studied and we found out from Indian Institute of Management (IIM) Calcutta report that we came out, India wastes about Rs 88,000 crore by the trucks standing at the border controls or at the regional transport offices (RTO) or for toll for that matter. This is a huge drag on the overall economy, the overall cost of doing business, the overall logistics cost.So, what we estimate is that if the GST and network is ready, before the goods get to these state border controls, the information is already there and that would mean that the good could move seamlessly, the trucks can move faster, the turnaround on the trucks will improve. So, that is one on the efficiency side.On the second side is the warehousing. Companies today have multiple warehouses across the country, maybe 20-30. If those get consolidated into larger warehouses, you will see better inventory management, better visibility. So, all of these efficiency points should probably lead to about, perhaps in the next 2-4 years, a reduction of maybe 5-10 percent in terms of overall logistics cost for any company which includes inventory as well as transportation costs.Latha: You have done an internal study for the group itself? How much you might possibly save in terms of rationalising warehouses, stockists, logistics costs?Godrej: It is a very high number. Logistics itself would save tremendously. We should also remember that exports will also benefits because today, exports do not get refund on all the indirect taxes going through the logistic system of the inputs. So, exports will become more efficient.However, savings would be very considerable and efficiencies will be very considerable. A lot of it will get passed on for competitive reasons. That will mean lower consumer prices, higher consumption and higher production.We must remember that when we changed over from the state sales taxes to the state VAT, our GDP growth grew very well. Unfortunately at that time, it was not attributed to that change, but now it is clear that those days when we went up to 9-9.5 percent GDP growth rate, that particular factor had a major part to play in it. And this will also happen. And now, with the good monsoon we predicted for the next 3-4 years and with the GST if it is implemented on April 1, as scheduled, India could get into a double digit GDP growth rate for 3-4 years.Sonia: From your vantage point of the export countries that you have been interacting with countries abroad more than 160 countries have switched to GST like regime in the past and the experience has taught us that in the very near term inflation spikes up and consumption slows down, something that we have seen recently with countries like Australia, Malaysia etc. What is the sense that you are getting about the near term impact that the GST could have on the economy?Munjal: You make a very good point, first we have to understand that the implementation is not going to happen tomorrow. There is a process involved from where it is now it still has to go back to the Lok Sabha and then it has to go to every single state in India to pass within their assemblies and the infrastructure itself is going to take a little bit of time to rollout. You have started the process of implementing the GST network, which is an IT backbone on which all this data will reside but that is not all complete yet.So, first is the time lag between now and the actual implementation. Then when the implementation does start there is an actual time lag to realise the benefit. In some cases, there has actually been a reversed reaction in the first very initial period but that is for a very short time. In some countries it has been for few months and in some, it has been for a year or two, nowhere has it been a longer than two years. Since the central government or the current act provides for full compensation to the state for any loss of revenue for five years, the states today feel safe in switching over.If you go back a little bit in time when the Kelkar Committee made the first set of recommendations in the major tax reforms, they had suggested a value-added tax (VAT) switching to a seamless GST. Their recommendation was for a complete transition to GST all the way including trying to roll in every single tax that currently affects individuals and corporates; going as far as to ask for even the stamp duties on land to be rolled in. Of course what we see today is a modified version but the original intent is very clear in what the attempt here is.Latha: Adi Godrej was speaking about substantial benefits in logistics, in warehousing rationalisation and may be stockist rationalisation for the FMCG space, what about yours?Munjal: Without going into details of our own entity, I will say that this is a very significant step forward for all enterprises in India. One of the issues today is companies organise their warehousing in logistics based on the differentiation of taxation in different states. That may or may not be the most efficient. In fact in many cases it is not the most efficient. Now you will create a warehouse where it makes more sense from your product and the market, not based on taxation of different states because that will become standard through the country. So, there will be a significant benefit which will flow into the system from this.I do however want to add a word of caution, not warning, for one point that you made that the benefit will not be immediate. Also there is a whole lot of other things we still have to do to realise the full benefit. Part of it is to do with fully rolling out the GST and not the quantum that we are doing right now. The other is to do with other initiatives on labour etc, which also still need to pick in. There are 25 states, which have still not made changes in their labour regulations and so on and so forth.So, for us as a country to realise a full benefit for the consumers and for industry, we still have some distance to go and this is a very big step forward and industry all across the country has welcomed this move.Latha: That question to you raised this point as well about how the excise will be on the ex-factory price and before we advantage to you, will be lower and the actual applicable GST which is lower will be at the showroom. Any other problems you see like I raised, do you know whom you will be paying what tax?Bhargava: I don’t see we have a problem on that account but as we have understood it, the GST rate is going to be revenue neutral at least it is designed to be revenue neutral and therefore I would imagine that the overall impact of taxes, whether it is the central GST or the state GST, will not make much difference to the total taxation on the products.Sonia: A couple of more concerns that were highlighted from Sunil Munjal about the inflation impact and he did say that that impact could fade away within months as we have seen in some of the other markets but talking about concerns, I also wanted to ask you, there are some uncertainties owing to the dynamic nature of finding the correct revenue neutral rate. The Chief Economic Advisor (CEA) has said that if it is at 15.5 percent then it will be inflation neutral, what is your own wish list, what do you think the right revenue neutral rate should be from a corporate standpoint?Godrej: In my view, the revenue neutral rate will be very low because I don’t think the government or industry is taking into account the much lower tax evasion that would come about.Today it is not in the auto industry at all because those are many large manufacturers but in all industries, which produce small products for consumption, there is a lot of excise evasion in our country and that will come to a halt with GST.That means government revenues at lower rates will rise dramatically. What you will find is that the Central government will have to have absolutely no compensation to the states. This was a similar problem when the state sales tax moved to value added tax (VAT) and couple of states didn’t join because they thought they would be losing with joining. That was Uttar Pradesh (UP) and Tamil Nadu -- immediately they joined.These VAT type of taxes eliminate evasion and that leads to much higher revenues. To my mind even 15 percent rate would be revenue neutral and if it is 18 percent, the government revenues will rise considerably.I see a regime in years to come of lowering these rates. In other countries it led to inflation because they started VAT at a level, which was much higher than the original indirect taxes. That is the problem in Japan now looking to raise VAT rates.In our country, we already have very high indirect taxes and we are going to much more efficient system. So that is the overall benefit.Latha: What is your take? Does some kind of and inspector-raj end?Munjal: To a large extent yes, because the question you asked was who collects the taxes. It does not matter who collects it, whether the state or the central government collects it because it is one point collection, and the backend itself is automated -- and that was the idea of the GST network -- to allocate the resources in a predetermined fashion.So the manual and the human intervention gets minimised to almost nothing therefore, the physical interface, which causes the friction and the corruption, to a large extent will go away and because the design on the GST is such, you only get a set off if you paid the tax at the previous stage. As Adi Godrej said, completely obviates a need for people to bypass the system and raise invoice or sell good without invoices, etc. So, the benefits are plenty.Incidentally, to answer your earlier question, the revenue neutral rate as calculated by the previous finance commission was below 12 percent. It was 11.7 or 11.2 percent, I do not remember the exact number. So, we are very far away from revenue neutral rate, but industry is still saying regardless of that, we are happy to go ahead and implement this.