GST Bill: How it will change India

By Registrationwala

6th April 2017

 

India, since time immemorial, has followed the concept of indirect taxes. This model has led to several businesses to alter the way they function to counter the complexity and the costs involved. However, once the GST is implemented, it will change the way business is done in India. And it will change India for good. That is what can be safely assumed as of now. Currently, in India, approximately 14.6 lakh rupees are collected as tax. Of this sum, about 34 percent is collected through indirect taxing. More than 4.5 lakh crore is collected through service tax and excise duties. Once the GST is implemented, the indirect taxing in India is expected to evolve. It will impact excise, state-level VAT and service tax. The revenue mix is also a reflection of the development index of the country and changes depending on how the country fares economically. To understand it better: normally a developed country will have a lower share of indirect taxes in its total tax collection, while a developing country will have much higher indirect tax collection. After GST, the percentage of indirect tax is expected to go high in India.

Before we move on further on the changes expected to be brought on by GST in India, let's tell you about the sectors that won't come under the purview of GST

  1. All petroleum products will be kept out of it
  2. Entertainment and amusement tax that are charged and taxed by Panchayats or district councils
  3. Tax on alcohol consumption
  4. Stamp duty and custom duty
  5. Consumption and sale of electricity will also be not covered by GST

Now we know what are the sectors that won’t come under the purview of GST, let’s move to what are the objectives that the new tax system seeks to achieve.

Some of the major objectives of the GST will include

  1. It will try to ensure the availability of input credit cross across the value chain.
  2. Among other objectives, the GST will also seek to minimise the cascading effects arising out of taxation
  3. The entire idea of GST is to simplify the tax administration and compliance
  4. Once GST takes full control, tax laws, base and tax administration process will be harmonisedin the country
  5. Due to GST, tax rate slabs will be minimised and it will help avoid classification issues
  6. Often the states indulge in ugly completion to rake up more revenue through taxes. Since GST will have a uniform taxing system for all the states, it will help abate such competition.
  7. And last but not the least. GST will ensure an increased tax base and lead to raising the compliance

No matter how noble the objectives are behind any economic reform, it is seldom a smooth process. Ranging from political to social, the path to change is full of impediments. There are certain implementation challenges as far as GST is concerned.

  • Issues with adaptation: Despite the government working on war-footing to get GST implemented, it has failed to get everyone concerned on board for a timely adaptation. However, things are expected to get better.
  • Lack of skilled labour: Because GST is new, there are still issues with skilled staff to oversee the process. Also, India does not have a greater skilled force to tackle such issues.
  • If there is a case of double registration, it might lead to increased compliance and costs
  • Despite all the development and the progress made over the years and particularly after the economic reforms of 1991, India lacks a clear mechanism to curb tax invasion
  • And last but most important, it is almost impossible to predict the impact of GST

Inflation and GST

One of the major factors concerning the economics and the common people alike is how will the GST impact inflation rate. It becomes imperative considering India’s tag of a rapidly growing country.

The GST that has been proposed, it is expected to lead to a decline in the effective tax rate on goods.

About 35-40 percent of the goods are not covered under GST. Most of it comes from agricultural produce. So not much is going to change in that regard.

As far as the service-oriented components are concerned, they make for about 20-25 percent of the consumer price index basket. Among others, housing, transport and communication sector are the major shareholders here. About 12 percent of the basket is exempted from service tax and these services are expected to be kept out of the purview of GST.

So we can safely assume, as of now, that GST will not have a major impact on the inflation rate in the country.

Different sectors and impact of GST on them

Automobiles

In the current scenario, the effective tax rate in the automobile industry ranges from 30-47 percent. On the implementation of GST, the tax rate might oscillate somewhere between 20-22 percent. Thus the demand for the automobiles will increase costing the buyer at least 10 percent less than what it costs today. The transportation time and overall cost will be cut down because the goods will be transferred within states without much ado at checkpoints. Apart from this benefit, the logistics and supply chain cost is expected to be cut down by 30-40 percent. Foreseeing from where the economy is right now, GST is expected to boost the automobile sector.

Durables

In the current market, the tax rate ranges from 7 to 30 percent in this sector. Once GST is implemented, it is expected to boost those companies that have not availed the tax exemption benefits in the past. This will definitely lead to the reduction in the price gap products between the organised and unorganised sector. Since the warehouse and logistics costs will be cut down by a big margin, it will definitely improve the operational profits by a big margin. Some economists are predicting that it might see a growth of 300-400 bps.Also, the seventh pay commission’s implementation will increase the demand and boost the fund inflow in the consumer durables sector.

As far as the impact of GST on this sector is concerned, it is expected to remain neutral or in some cases might be negative too, because a lot of companies in this sector have enjoyed tax exemptions so far.

FMCGs

The impact might be neutral or remain negative as most of the the FMCG companies have enjoyed tax exemption so far.

Furnishing, home décor etc.

Furnishing and home décor sector have the effective tax rate of above 20 percent these days. But with the implementation of GST, construction companies such as paint and chemical making companies will benefit hugely from lower tax rates. The organised sector contributes 65-70 percent of the market share. Better tax collection practices under the GST regime will make sure that the price difference amongst the unorganised sector and the organised sector gets lowered. Thus this will lead to better opportunities for the organised sector. Also this will ensure that the overall competition in products such as ceramic tiles, faucets, sanitary, plywood etc is reduced. Once the GST is implemented, it will ensure a uniform tax collecting system for the unorganised sector. Since the implementation of GST will ensure that the transit time is reduced by a great margin, it will help in greater utilisation of truck. Also this will fuel the demand for heavy duty trucks, thus lowering the overall transportation cost. Seamless and streamlined inter-state flow of goods will naturally abet the demand for logistic services in the country. It is not unknown that the logistic sector is highly fragmented and there are several players. Most of these players avoid tax which leads to a gap of cost between the organised and the unorganised sector. Once the GST is rolled out, there will be a positive impact on the sector as there will be a reduction in the cost competitiveness with all the players coming under one single tax umbrella.

Cement

This industry is one of the largest taxpayers as far as the percentage is concerned. In the current scenario, the effective tax rate for cement range between 27-32 percent. However, the GST will make it come down to 18-20 percent. Thus there will be reduction in the transportation cost which currently eats up to 20-35 percent of the total revenue generated by the industry. Since companies will be able decentralize the warehouse for their products this will further boost the industry. Cement sector is going to be one of the major beneficiaries of GST roll out.

Entertainment

Multiplexes have to pay several taxes like service tax, entertainment tax and VAT among others. All these taxes account to22­24 per cent. Post GST, the aggregate tax will come down to 18­20%. Once the tax rate is reduced, the average ticket price (ATP) will go higher. However, there are certain challenges that will be faced when implementing the GST in the entertainment sector. First issue will be the availability of limited credit for service tax paid on lease rentals, maintenance cost, advertisements, security charges. Also No credit is available on the taxes paid on capital expenditure. Entertainment tax rate on box office collections ranges between 22­24 per cent it cannot be converted against any input taxes. However, it is expected that these issues will be sorted once the GST is rolled out all over the country.

Media

As far as the DTH service provides are concerned, effective tax rate for them ranges between 20­21 per cent, including the service tax of 14 per cent and entertainment tax of around 5­7 per cent.On the other hand, the same tax for broadcasters is somewhere between 14-15 percent. Once GST is implemented, the rate will vary between 18-20 percent, which is obviously lower than the current rate for the DTH providers but higher than the rate applicable for the broadcasters. The news and print medium which is currently exempted from all forms of indirect taxing will come under some concessional rates. GST will definitely be helpful for the DTH providers but not so much for the broadcasters. It is expected that the news and print medium will largely have neutral effect of GST.

Textiles/garments sector

The current effective tax rate for this sector is 6-7 percent. There is enough ambiguity over what tax rate will be applied on the readymade garment sector. However, the companies may have to incur some losses if the output tax rate gets high. Some export companies, though, can benefit by availing duty drawbacks.

Pharma sector

It’s one of the most important sectors and all eyes will be on how it performs under GST. Presently, the sector has various location-based incentives in the country. The effective tax rate for most companies well below the standard tax rate, that is 6 percent. The concessions for the sector are expected to continue for the sheer value of the services it does for the society. Also the current tax exemptions will continue until the expiry of the exemption period. It might be a tad difficult to introduce new exemptions. The logistic costs will get cut down and hence benefit the sector. But mostly the impact will be neutral on the sector.

IT & ITeS

The IT industry in the country right now has an effective tax rate of 14 percent. GST will take this rate up to 18-20 percent. The IT industry relies on export services which have been kept outside the purview of GST and hence these services will continue to be exempted. Legal issues surrounding the taxability of canned software might come to an end as GST will not distinguish between goods and services. Hence the sector may see a neutral growth and in some cases the impact might just be a little negative.

Telecom sector

About 14 percent tax is levied on telecommunication in the current scenario. Once the GST is rolled out, the tax rate is expected to increase to 18 percent. And there doubts in certain corridors that the telecom sector might ease the burden on prepaid buyers by increasing the tax on the postpaid customers. Also easy availability of input tax credit is bound to reduce the capex cost. It is one of those sectors which might have to incur some losses as the increased effective tax rate cannot always be transferred to the end customer.

Metal products and GST

Metal based products have an effective rate of 19-21 percent in the country. Also, there is 4-5 percent of VAT but that s subject to the state. Excise duty accounts up to 12.5 percent and custom up to 2 percent, also there are some taxes on entry. It is yet not known whether, under GST, metal products will have a special rate that is lower than the standard GST rate.

GST in banking and financial services

The effective tax rate in the banking sector is 14m percent and even that is levied only on fee component but not on interest of the transaction. Once the GST is into effect, the tax rate on fee-based transactions is expected to increase to 18­20%. Once the tax rate increases on input services, it will impact the operating expenses such as rent, legal and professional fee, advertisement, insurance and other expenses. Hence all this will increase a bit. Clearly the introduction of GST will lead to a moderate increase in the cost if financial services, mainly loan processing fees, card charges and insurance premiums.

 

GST Bill: How it will change India

2017-04-06