GST And Low Investment Add to New Company Formation Challenges In India

The Indian economy had slowed considerably since the demonetization policy was effected in Q4 of 2016. In Q2 of last year,  the country recorded an increase of 5.7 percent, the lowest in the past three years, prompting many economists to blame this lull on demonetization, among other reasons like the then newly introduced Goods and Services Tax (GST).

Many sectors like manufacturing, real estate, agriculture and finance have been under stress over the past year. Discontent has been witnessed among agrarian in states like Madhya Pradesh, Tamil Nadu and Maharashtra, with farmers protesting and demanding loan waivers during the summer months; all attributed to demonetization.

So, news of a new taxation system coming in effect amidst all the impact on consumers was very unpleasant. Goods and Services Tax (GST), an indirect tax levied in India on the sale of goods and services. Goods and services are segregated further into five tax slabs for the collection of tax – 0%, 5%, 12%, 18% and 28%. The tax replaced existing multiple cascading taxes levied by the central and state governments and came into effect from July 1, 2017.

The tax rules, rates and regulations are governed by the Goods and Services Tax Council that comprises of finance ministers of centre and all the states. GST was made to replace the layers of former taxation system with a new, simple unified taxation system. It is interesting to note that GST has been in practice in about 160 countries including Canada, Malaysia, Singapore, Austria, just to name a few.

According to the government, the benefits of GST are easy compliance, uniformity of tax rates and structures, removal of cascading taxes, improved competitiveness. To manufacturers and exporters, GST is aimed at reducing the cost of inputs and locally manufactured goods and services by subsuming significant central and state taxes thereby increasing the competitiveness of Indian products and services in the international market, give a boost to Indian exports and aid formation of new companies in India.

It is also projected to reduce the compliance cost due to uniformity in tax rates and procedures. For the consumers, GST is aimed at a single and transparent tax proportionate to the value of goods and services, relief in overall tax burden.The decision of the government to begin the implementation of the Goods and Services Tax (GST) in July impacted key sectors of the economy. This is attributed to complexities of the policy and its faulty implementation. The proposed GST rate is higher than the Value Added Tax (VAT), dual control where the states lost autonomy to the GST council and loss incurred by manufacturing states.

GST came about eight months after the government cancelled 86 percent of the currency. This made manufacturers cut production and dealers offering discounts on items such as cars. As a result, manufacturing growth slowed to 1.2 percent Q2 quarter from 5.3 percent in Q1 while mining activity dipped by 0.7 percent. However, construction rebounded from -3.7 percent in Q1 to 2 percent Q2. Transportation, hotels and trade impacted by demonetization in Q2 grew from 6.5 percent to 11.1 percent, mostly due to discount sales ahead of GST implementation.

The implementation of GST is premised to have some positive effect on startups like making the launch of a new business easier, simplifying the entire process of taxation, reduced cost of logistics, and it still has it’s cons on company formation in India. For instance, under the new regime, a business will have to register online for GST in every state involved in its sales process, GST returns will also require you to close your books on a monthly basis which will cost man hour. These and other limitations of GST will impact company formation negatively.

Investment slowed as rising cost of inputs drove up the prices of smartphones. Major inputs fingered are displays, and change in tax structure after implementation of goods and services tax (GST regime. This caused India’s mobile phone market to grow only marginally in 2017, to 270 million phones by shipments while the shares of smartphones may increase by five percentage points citing a forecast by Cybermedia Research (CMR ).

Rising price of raw materials like steel, cement price rising from Q1 to Q4 was not a welcomed development. Cement prices rose across regions as firms pushed over price increases to consumers. In the polymer industry, this surge in the cost of materials in Q4 of 2017 has led to a price review effective January 1, 2018. Pet coke prices rose 12 percent in Q2. Power and fuel cost too witnessed hikes due to rising coal prices. Diesel was not indifferent as it climbed 6 percent in price.

These realities have placed a restraint on investment. Although the economy has moved out of the effects of demonetization, the impact of GST is still lingering, and a lot of challenges still await the formation of new companies. A positive however is the stock sector that seemed unimpacted by these factors. In the midst of all the troubles, the stock market’s growth was unimpeded as highlighted by the World Bank’s Business Report 2018 ranking India as the 100th country in the ease of doing business. News of India’s leap brought a sigh of relief to the government as this was seen as a significant milestone.

India jumped 30 places from the previous year (2016). This was attributed to the recapitalization of the public sector banks to the tune of 2.11 trillion rupees (approx. 32 billion dollars) coupled with reforms introduced in the areas concerning insolvency resolution, GST implementation, Bankruptcy and Insolvency Act, 2017. Moody’s upgraded India’s sovereign issuer ratings to Baa2 from Baa3 in mid-November which gave the economy another positive showing. As the new has already begun, we can only hope and work for a better economy and the rise of company formation services in India.


jake Author

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