Ambiguity of GST is the Biggest Hurdle to Growth in Short Term

It is quite unfortunate that government’s effort towards the clarity of GST is inadequate and partially effective. This has delayed the revival of the manufacturing sector in India which has been awaited by the successive governments over last two decades.

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Ambiguity of GST is the Biggest Hurdle to Growth
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A large share of chief financial officers (CFOs) (31%) feels that GST will lead to challenge for the companies and the sector that is most affected is manufacturing, according to a survey conducted recently. With regards to demonetization, the Deloitte Annual CFO Survey results found that 54% of the CFOs believe that it has a neutralizing effect, while 56% has high optimistic level regarding growth in the macro-economic sphere for the next 4-5 years.

The survey report further noted, “The country remains optimistic about economic prospects, as it remains buoyant post demonetisation and amongst global uncertainties.” The elaboration of this report state that there will be global growth revival as indicated by macro-economic trends. The opportunities will be in existence in increasing investment and exports that have been concerning the policy makers for past few quarters.

All types of industries will be affected by the GST including the professionals. Till recently, the benefits emanating from the centralized service tax registration were enjoyed by the professionals in all places across India. However GST has the requirement that professionals who operate from multilocation offices will have to obtain state-wise registrations.

As far as the manufacturing sector is concerned, the ambiguous GST is weighing on its performance. The monthly survey conducted by Nikkei Purchasing Managers’ Index (PMI) shows the Output Index measuring growth of production has decreased to a three month low of 51.7 in June. In May, the same index was at 53.1. The reading below 50 is indicative of contraction, whereas, the reading above 50 is expansion.

Aditi Nayar, principal economist at rating agency Icra Ltd, anticipates contraction of quarterly and monthly consumption and production because of GST. “Volume growth is expected to falter in a number of sectors in the second half of Q1 FY2018, as some wholesalers and retailers trim inventories prior to the shift to the GST. In contrast, upfronting of purchases by consumers to take advantage of the discounts offered in the run-up to GST to reduce inventories, are likely to result in a dip in consumption growth in subsequent quarters, particularly during festive season,” Nayar said in a note.

The ambiguity of GST is the biggest hurdle the companies are facing. It is quite unfortunate that government’s effort towards the clarity of GST is minimal. Therefore, the advantage lies with companies that are familiar with this new tax regime as the company lacking the understanding of it is in a disadvantageous position. This has delayed the revival of the manufacturing sector in India which has been awaited by the successive governments over last two decades.