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Udey DhirJust last year we marked 25 years of liberalisation. In 1991, a liberalised investment and trade regime kickstarted the economy bringing about a landmark change in our economy and strongly positioning India as an economic superpower.

The implementation of Goods & Services Tax (GST) is a similar landmark step, which will lubricate the gears of the Indian economy and ensure a virtuous growth cycle for Indian industries for the next several decades. This bold step towards unifying our tax architecture to bring it in line with the world’s leading economies is also a critical step towards the government’s vision of improving the “ease of doing business” in India. It is expected to have radical transformation from a complex, multi layered and cascading indirect tax system to a single and unifed direct tax system that allows for tax set-off across the value chain, both for goods and services. This should help lower product costs and thereby make Indian goods competitive in comparison to imports, increasing proftability of companies. This effciency and improvement should help achieve larger economies of scale leading to harnessing of inflation.

GST will also reduce the compliance scrutiny for inter-state movement of goods, which is currently a major source of concern and results in deadweight losses owing to transportation time. Removal of these barriers should help the supply chain of manufacturing industries to become much more effcient.

Previously, all decisions with respect to supply and distribution were guided by the need to minimise the impact of indirect taxes. With the advent of GST the supply chain decisions will be a function of economic factors such as costs, proximity to market rather than non-economic factors such as VAT rate differential between states. This should lead to effcient reallocation of resources in the economy.

A centralised and standardised GST registration would help in creation of an ecosystem conducive to start-ups, which can adhere to a centralised tax system. A unifed system will also help reduce the compliance burden while allowing start-ups to compete on a level footing with established players. Also uniformity of tax systems across states can help all levels of production resulting in an improvement in the ease of doing business. The improvement in this ranking, which has been a key focus of the government, will also help attract more foreign direct investment and position India as a favourable and preferred investment destination.

Over the next 2-3 years, GST will have a cascading effect on the Indian economy and with structural enhancement, this can translate to a potential growth in GDP of 1-1.5%. GST should also help in the revival of an investment cycle which could bring in a disinflationary impact. The Indian economy’s wheels have been set in motion, and reforms such as the GST and the institutionalisation of the insolvency & bankruptcy code will act as lubricants to take this growth into the next gear!

Regarding the government’s resolve to merge the oil companies, while a deal for ONGC’s proposed takeover of HPCL is yet to be fnalised, the centre has already embarked on its next ambitious project of combining Indian Oil Corporation Ltd and smaller oil exploration frm Oil India Ltd. The proposed merger of Indian Oil and Oil India is part of the government’s plan to create mega oil PSUs of global scale, with vertically integrated functions across upstream and downstream. Vertically integrated oil companies would be better able to absorb the fluctuations in the global crude oil prices, as when the exploration unit will suffer from falling prices, the refning unit will beneft, and vice versa.

Season’s greetings!

Udey Dhir

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