Editorial Today – On the highway to a better trade regime

Issue Along with GST, India needs infrastructure for easy movement of goods.

What is the Goods and Services Tax? It is a tax levied when a consumer buys a good or service.

Advantages of GST? GST is a transparent Tax and also reduces numbers of indirect taxes.

Importance of physical infrastructure Opening of the Suez Canal in 1869 helped India participate in an expanding world economy.

Steps taken by government to build physical infrastructure The Indian government plans to build a network of 27 road corridors that will bring various parts of the country together.

Facts about physical infrastructure in India Though India has the second largest road transport network in the world, the growth rate of road development is slow.

How GST and improvement of physical infrastructure will benefit the economy India has one of the lowest average speeds for trucks.

Conclusion

Issue

• Along with GST, India needs infrastructure for easy movement of goods.

What is the Goods and Services Tax?

• As the name suggests, it is a tax levied when a consumer buys a good or service.
•  It is meant to be a single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc. This is how it is done in most developed countries.

Advantages of GST?

• GST is a transparent Tax and also reduces numbers of indirect taxes. With GST implemented a business premises can show the tax applied in the sales invoice. Customer will know exactly how much tax they are paying on the product they bought or services they consumed.
• GST will not be a cost to registered retailers therefore there will be no hidden taxes and the cost of doing business will be lower. This in turn will help Export being more competitive.
• GST can also help to diversification of income sources for Government other than income tax and petroleum tax.
• Under Goods and Services Tax, the tax burden will be divided equally between Manufacturing and services. This can be done through lower tax rate by increase Tax base and reducing exemptions.
• In GST System both Central GST and State GST will be charged on manufacturing cost and will be collected on point of sale. This will benefit people as prices will come down which in turn will help companies as consumption will increase.
• Biggest benefit will be that multiple taxes like octroi, central sales tax, state sales tax, entry tax, license fees, turnover tax etc will no longer be present and all that will be brought under the GST. Doing Business now will be easier and more comfortable as various hidden taxation will not be present.

In short it is being done to create a seamless internal market that promotes economic growth which is still an unfinished job in India. One part of the task is removing barriers to interstate trade through the goods and services tax (GST). The other task is to provide physical infrastructure that will allow goods to move across the country comfortably.

Importance of physical infrastructure

• Interlinked trade routes—be it the Suez Canal or the Silk Route—have always been essential to the spread of economic prosperity. For example the opening of the Suez Canal in 1869 helped India participate in an expanding world economy. An industrial boom followed, albeit under conditions of unequal colonial trade.
• Roads form vital links between markets that are not connected. They link producers to distant markets, promote economic specialization, provide linkages to other parts of the economy and generate positive externalities.

Steps taken by government to build physical infrastructure

• The Indian government plans to build a network of 27 road corridors that will bring various parts of the country together.
• India has over one lakh kilometres of national highways (NHs), but there is no scientific road network pattern and drivers can’t take a straight road to reach from one place to the other. To address this, NHAI has prepared a grid of 27 horizontal and vertical national highway corridors at a distance of every 250 km crisscrossing the country, conforming to the ambitions of Bharatmala—the government’s flagship project to “connect India like never before”.
• The greatest benefit of the proposed national highway grid would be for interstate trade. Interstate trade for India is less than 15% of gross domestic product, whereas the corresponding figures for the US and China are 40% and 35%, respectively. High transaction costs, which include physical and legal infrastructure problems, are among the primary reasons for the low level of such trade in the country.

Facts about physical infrastructure in India

• Though India has the second largest road transport network in the world, the growth rate of road development is slow compared to the growth of road freight and vehicle volume.
• The disproportionate burden of freight on roads does not help either.
• The current road to rail ratio of 70:30 is inadequate and inefficient for economic as well as environmental reasons.
• In India and elsewhere, travel—both passenger and freight—involves costs in terms of money and time. The reduction of these costs requires the expansion of roadways as well as the simultaneous deployment of resources on alternative means of transport such as rails, inland waterways and air.

How GST and improvement of physical infrastructure will benefit the economy

• The current tax regime imposes significant time costs on interstate road freight via interstate checkpoints, and that translates to lower freight volumes moved.
• At the same time India has one of the lowest average speeds for trucks and about 60% of their time is taken up at these checkpoints and tollgates.
• Because of this India incurs significant costs annually due to additional fuel consumption costs and transportation delays. This makes producers less competitive despite having competitive input prices.

GST and improvement in physical infrastructure will be able to tackle this problem upto a certain extent.

Conclusion

• Freight transport depends on the volume of goods produced, location of suppliers and consumers and efficient use of resources.
•  But in India, infrastructure problems and red tape have compromised the manner in which these factors are balanced—and consequently, the demand-supply equation.
• The highway grid will not set it right by itself. But it could be a good start.