Contributed by CA. Dr. Dilip V Satbhai
The passage of the GST bill by Loksabha has paved the way for introduction of GST law in India, likely to see the light of the day on 1st July 2017.
The need for GST has been felt because under the current indirect tax structure as
(a) tax barriers have fragmented the Indian market,
(b) cascading effects of taxes on cost have made indigenous manufacture less attractive,
(c) complex multiple taxes have raised cost of compliance,
(d) goods and services were charged some times by both laws i.e. VAT and Service tax and the percentage of tax exceeded 140%
What is GST?
The GST is basically an indirect tax that brings most of the taxes imposed on most goods and services, on manufacture, sale and consumption of goods and services, under a single domain at the national level. In the present system, taxes are levied separately on goods and services. The GST is a consolidated tax based on a uniform rate of tax fixed for both goods and services and it is payable at the final point of consumption. At each stage of sale or purchase in the supply chain, this tax is collected on value-added goods and services, through a tax credit mechanism. Previously it was ‘sale’ that mattered most but under GST it is ’supply’ that will matter most. Similarly state where sale took place collected the taxes and now under GST it is the state where goods/services are consumed, would collect the taxes.
Rates of GST
The GST Council has finalised a six-tier GST tax structure of Nil rate (exempted), Zero rated meant for export, 5 per cent, 12 per cent, 18 per cent and 28 per cent, with lower rates for essential items and the highest for luxury and de-merits goods, including luxury cars, SUVs and tobacco products, that would also attract an additional cess. Moreover, with a view to keeping inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate. The cess is expected to provide additional resources to the central government to compensate states for losses incurred. This will be based on the compensation formula which may bring the overall GST rate even to 40%.
Categorisation of items:
The exact rates applicable to particular goods and services have not been finalized and this will likely happen over the next few weeks. Hence, it is difficult to measure the exact impact across sectors. Based on the current tax rates (central excise and VAT) for key product segments across sectors and the proposed GST rates, we expect most sectors to gain or otherwise in a limited way. Is Parachute hair oil or edible oil? Is KitKat a chocolate or a biscuit? Is a Vicks tablet medicament or confectionery? For the taxpayer and the tax collector, this is much more than an exercise in semantics — hundreds of crores of rupees ride on the exact categorization as KitKat is a biscuit and Vicks a medicament. In the KitKat case – Nestle (India) Ltd v/s Commissioner of Central Excise, Mumbai, 1999 – it was ruled that the product was a biscuit and not a chocolate, which is taxed at a higher rate. Meanwhile, companies are lobbying the government to categorise biscuits as essential products under GST, which would mean their being taxed at a lower 5 per cent. As part of GST implementation, service tax is expected to go up from the current levels of 15 per cent, which will be negative for service oriented companies in airlines, telecom, insurance, etc., in terms of demand impact.
Advantages of GST:
GST is expected to have a favourable outcome on the economy
1. Removal of tax barriers with seamless credit will make India a common market leading to economies of scale in production and efficiency in supply chain. One tax, one market, is good for doing business across the country
2. Removal of cascading effect of taxes embedded in cost of production of goods and services, significantly reducing cost of indigenous goods and indirectly promoting ‘Make in India’. Tax on tax will be avoided.
3. Facilitating ease of doing business – Integration of existing multiple taxes into single GST will significantly reduce cost of tax compliance and transaction cost.
4. Stable, transparent and predictable tax regime to encourage local and foreign investment in India creating significant job opportunities.
Sectoral Impact analysis:
1. An important fall out of GST could be shift from unorganised to organised segment. The unorganised sector will come into the tax net and will lose the benefits arising from non-payment of taxes and levies. Thus, companies which are operating in sectors will high unorganised component will benefit in terms of increased demand. Companies in sectors like plywood, ceramic tiles, batteries, etc. will stand to benefit.
2. The sectors which have long value chain from basic goods to final consumption stage with operation spread in multiple states such as FMCG, pharma, consumer durables, etc should benefit. FMCG companies could generate substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated. FMCG companies pay nearly 24-25 per cent including excise duty, VAT and entry tax and a lower rate of 18 per cent could yield significant reduction in taxes. But a higher GST rate of 28 per cent for consumer durables and some FMCG products may disappoint the market. Warehouse rationalisation and reduction of overall tax rates, is expected to generate saving.
3. Some automobile companies could gain from GST implementation if the GST rate on their products is 18 per cent and they are able to retain the benefits of lower rates. However, the higher rate of 28 percent would be negative versus expectations.
4. Services sector, like telecom, education could face marginally negative impact from the higher service tax rate of 18 per cent (likely) versus 15 per cent currently.
5. The tax returns compliance is very much not desirable as ordinarily 37 returns will have to be filed by a small businessman whereas 61 returns state wise will have to be filed by medium and large scale businessman who are also input service distributors, Special cell will have to be constituted for only filing of returns.
6. The working capital requirements also would go up appreciably if tax paid at the time of purchase has not been deposited by the concerned businessman, as input tax credit will not be available if GST in has not been paid by the concerned businessman. The identification of intra state and inter state transaction also need to be made properly and carefully. If CGST and SGST is charged instead of IGST or vice versa, if mistake has not been rectified for long, the businessman would run the risk of making payment twice in this matter.
7. The services sector contributes 59% of the GDP where as 25% and 16% contribution comes from industry and agriculture sectors. Increase in service tax will impact a lot on all service industries where as cost of few products in industry sector would be go down and in some cases it would increase.
Macro benefits emanating from implementing GST far outreach the negatives in the long run. It is also a significant change communicating to the world at large that we are focused on one path for economic progress. It also would increase the GDP sizably.