Why India's GST is China's headache

The new taxation regime, by its design, is likely to break the interstate supply chain of cheap Chinese products.

 |  4-minute read |   03-07-2017
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The Goods and Services Tax (GST) has an interesting China connection. The country's transformational tax reform may turn out to be a strong deterrent to cheap Chinese imports in India. 

The GST, by its design, is likely to break the interstate supply chain of cheap Chinese products, leading to a reduction of such imports here. However, imports of large products will not face the heat, but the unavailability of cheap Chinese products may push inflation in some segments.

Consumables consists of a major part of cheap imports from China, which are distributed through unregistered and cash-based trading networks spread across India. Toys, low-priced electronics, computer components, crockery, mobile accessories, lightings, stationary, plastic wares, building material (floorings, wallpapers) and ceramics are some of the cheap Chinese imports distributed across the length and breadth of the country via major trading cities.

Since the GST may put an end to the existing distribution chain, it is not unreasonable to predict that traders in Gaffar Market and Nehru Place of Delhi or Manish Market, Musafir Khan, Abdul Rahman Street in Mumbai may witness the return of pre-1991 era of regulated imports at least for a short period of time.

The supply chain of cheap imports from China starts from the placement of orders to suppliers by Indian importers. Cheap imports take place in bulk and come to India in large containers. Importers pay import duty of 14-28 per cent and countervailing duty (CVD) between 0-150 per cent (average 12 per cent) depending on the products.

Given the cheap labour, and heavy subsidies on manufacturing in China, Chinese products make domestic producers unviable. With a view to keep the market competitive and curb dumping, the WTO has nudged countries to levy countervailing or anti-dumping duty on such imports. Recently, India had levied CVD on ceramic tableware and parts of sewing machines.

The interstate distribution of Chinese goods is the backbone of cheap Chinese imports. Suppliers cannot sustain with bulk supplies, without a quick distribution of products in regional and upcountry markets. This is why we notice a similarity in Chinese goods available across regions.

After the arrival of containers in Indian shores, product samples move across the markets and orders starts pouring in from the likes of Gaffar and Manish Markets of different cities. Chinese products reach final consumers through a shoddy network of small and regional distributors and retailers where most of the sales take place out of the authorised channel.

Even after paying high countervailing duties and bribes to taxmen, Chinese products remain cheaper and offer good margins. The small traders from far-flung areas buy the products in bulk as consumers (B2C) but sell the same products in their towns to final consumers.

The GST is going to heavily hit this supply chain in the following manner:

- As GST will put an end to unregistered interstate movement of goods, the traders of Chinese products will come under the scanner.

- Traders under exemption and incentive schemes (20 lakh-75 lakh) can't be allowed to go for interstate trade. Therefore, supplies of cheap imports to the upcountry from regional trading centres won't be possible without going through the GST network.   

- Only a small quantity of Chinese imports will be able to seep out from the GST network through the fake B to C trade.

- The trade of Chinese goods is likely to be confined within local markets in state boundaries and volumes will dip significantly. 

- Chinese goods may lose their price advantage if they move through the GST network after paying prescribed duties.

- Interestingly, the government has placed quite a few goods like ceramics, plastics, sanitaryware including the highly criticised sanitary napkins in higher tax brackets of GST as an apparent measure to curb Chinese dumping.

GST's impact on cheap supplies will be painful in the short-term because:

1) Cheap Chinese products significantly bust inflation in segments like construction, plastics, housewares and electronics. Consumers may face shortage of supplies in these areas in the coming months. There is a buzz on the street that traders have already cancelled their orders for the festive season.

2) Businesses like computers (hardwares), electronics, construction (floorings, wallpapers), will be the most hit by skewed supplies of Chinese products. New supplies under GST will definitely be pricey. 

3) This may lead to unprecedented inflation in products and services heavily dependent on Chinese inputs.

4) There will be job losses in retail trade in cities and town on the back of the Chinese factor.

Some impact of GST on Chinese imports will be visible in the next six months on cheap consumables if not on the large supplies.

One may conclude that the GST is a blessing in disguise for domestic producers as they can generate new production lines and target import substitution to grab the market bereft of Chinese supplies.

However, the GST is a double-edged sword. It may firewall cheap imports but may not make domestic production cheaper for small scale industry due to heavy taxes on several products with steep cost of compliance.

GST may come as a disruptor to Chinese imports in India, but whether it makes India's small manufactures competitive will remain a question.

Also read: How GST will support black money


Anshuman Tiwari Anshuman Tiwari @anshuman1tiwari

Editor, economic analyst, columnist, author

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