Why India's GST Is China's Headache

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.