The Constitution (One Hundred and Twenty-Second) Amendment Bill 2014, unofficially and commonly better known as the ‘GST’ or the ‘Goods & Services Tax’ Bill, has been passed by both the upper house Rajya Sabha and the lower house Lok Sabha of the Indian Parliament. The implementation deadline for this Act is the 1st of April 2017. Pithily put, it is a witness of the winds of change sweeping through India’s political culture and federal structure, where governance is at the forefront. Universally expected to help boost India’s GDP growth by 100-200 bps, as GST will facilitate faster and cheaper movement of goods across the country via an uniform taxation structure, pundits and policy wonks have all raving about it as the single most important reform to come after the 1991 liberalisation, and name it a harbinger of ‘acchhe din’ for our economy. So what is this GST and what does it augur for our economy ? It is indeed important we look at the nuts-and-bolts of this legislation and how it is likely to affect our lives. NRI Achievers takes a look …
The Goods & Services Tax, aka GST, is envisaged as a comprehensive indirect tax on the manufacture, sale and consumption of goods and services across India, to replace the myriad taxes levied by central and state governments. GST will be levied and collected at each stage of sale or purchase of goods or services, based on the input tax credit method, with administrative responsibility generally vested with a single authority.
Model law provides that the GST will replace all the service, entertainment and luxury taxes completely, whereas some central excise and state value-added tax laws, most of which will also be subsumed, shall continue to apply to some specified goods, namely petroleum, alcohol, and tobacco. India has 29 states and 7 union territories with a varied tax rate and structure. The dual GST model (central GST and state GST) proposes to replace around 29 state and federal taxes and tariffs with a single tax at the point of sale. The current combined Centre and state statutory rates for most goods works out to be 26.5%, but GST is expected to bring it down to between 18~21%.
As India is a federal republic, GST would be implemented concurrently by both central and state governments. The implementation would however result in some revenue losses to the states. To tackle this, the central government has assured states of compensation for any revenue losses incurred by them for a period of five years from the date of introduction of GST. Prospects of the Union government meeting its 1 April 2017 GST implementation deadline looks possible as of now, as states across the political spectrum are moving apace to ratify the tax reform, with 14 states on-board as of this writing. The bill needs the backing of at least 15 states before it can be sent for presidential assent.
Once the Constitution Amendment Bill is enacted, the government will set up a GST council that would decide on crucial issues such as tax rates and finalize three GST laws. The government is aiming to table the central GST law and the integrated GST law during the coming winter session of Parliament. The state GST law will go to all the states for passage.
The benefits of GST implementation are manifold. From our reading of the Bill, the following benefits would flow to the economy, government, consumers and industry:
- Amalgamation of several Central and State taxes into a single tax will mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax ought to lead to easier administration and enforcement.
- From the consumer’s point of view, the biggest advantage will be in terms of an overall reduction in the tax burden on goods which today is estimated to hover at around 25% – 30%.
- Free movement of goods from one state to another without stopping at borders for payment of state tax or entry tax and reduction in paperwork to a large extent.
- More competitive manufacturing can spur Make in India.
- Cost of goods can also come down drastically as a one-nation-one-tax GST structure can massively reduce the long and winding queues at border check-points and other entry points within and between states.
- Exports could get a competitive edge.
- Fewer tax disputes.As you can well understand, benefits are indeed manifold. But having said that, it would indeed be partisan to not mention the serious challenges in implementing this new paradigm. Actual GST implementation will need to overcome a whole slew of legislative, political, fiscal and administrative challenges like:
- RNR, or Revenue Neutral Rate, is one of the prominent factors for its success, wherein the government has to focus on at least the revenue remaining the same despite giving tax credits.
- While achieving a broad-based tax structure under GST, both the Empowered Committee as well as the Central Government must ensure that lowering the threshold limit is not a “taxing” burden on small businessmen in the country.
- The Government has already incorporated a Goods & Service Tax Network (GSTN). This GSTN has to develop a GST portal which ensures technology support for registration, return filing, tax payments, IGST settlements et al.
- GST is a different animal altogether, absolutely different from the existing system. Ergo, it requires that tax administration staff at both Centre and State be appropriately trained and are efficient in terms of concept, legislation and procedure and as well as facilitating smooth transition from the existing to the new system.
- The law needs to provide more clarity on registration and maintenance of documents at more than one place of business.
- Of paramount importance is the need for the Law to address the mechanism for dispute redressal between the Centre and the State Governments.
- With a spiralling increase in online business/e-tailing, the law needs to make provision for refund/adjustment of tax for goods returned.
- Business houses will need to put systems in place to be GST compliant, and also manage their supply-chain to take advantage of GST.Let us now take a look at how GST is likely to impact the Indian economy sectorally. The largest and most major impact of GST will be on the logistics and supply-chain management domain, which on implementation of GST could witness considerable cost reduction, and the same would percolate to the manufacturing concerns this domain services. Depending on the fixation of the GST rate, various sectors will be impacted differently. However, based upon existing data available on the various domains, GST impact on a few sectors can well be prognosticated as portrayed below:
SECTOR/OVERALL IMPACT EFFECTS OF IMPLEMENTATION Automobiles (Positive) l Tax rate expected to oscillate between 20 – 22% as opposed to current range of 30 – 47%. Consumer Durables (Neutral or Negative) l Will benefit companies not availing tax exemptions in the past.
l Reduce price gap between the organised and unorganised sector.
Furnishing & Home Décor (Positive) l Lower tax rate for Paints & other construction chemicals companies.
l Overall cost & competitiveness in products like ceramic tiles, faucets, sanitary ware, plywood & laminates manufacture will be curbed.
l Reduced price gap between organised and unorganised sector. Growth opportunities for organised sector will improve.
Cement (Positive) l Tax rate expected to decline to 18 – 22 % from current range of 27 – 32 %
l Improved overall realisations substantially
Entertainment (Positive) l Tax rate expected to trickle down to 18 – 20% from the current levels of 22 – 24%, which will lead to increase in average ticket price and higher revenue. Textiles/Garments (Negative) l Tax rate expected to decline from current range of 6 – 7%. However, no clarity whether a lower rate will continue for the ready-made garments.
l Export companies may avail duty drawback benefits.
Pharma (Neutral) l Sector enjoys various location-based tax incentives. Concessional tax bracket expected to continue. IT & ITeS (Neutral to slightly Negative) l Tax rate expected to increase to 18 – 20% from the current rate of 14%.
l Litigation around taxability of canned software will probably end as there will be no distinction between goods & services.
Telecom (Marginally Negative) l Tax rate expected to increase to 18% from the current rate of 14%.
l May pass the increased tax burden on postpaid subscribers & availability of input tax credit will lower the sector’s CapEx cost.
Banking & Financial Services (Neutral) l Tax rate on fee-based transactions could increase to 18 – 20% from 15%.
l Moderate increase expected in cost of financial services such as loan processing fees, debit/credit card charge, insurance premia, etc.
Given some grey areas and the lack of clarity on some aspects that exists as of today on GST, there could be varied deliberations on the impact of GST on the different sectors of our economy. The key is how it will affect us, the people of India in the immediate future, in the medium to long term. There could be a possibility that in the short term, GST may have a negative impact in the immediate future, but will settle down towards the end of FY 17-18. Over the past few decades, NRIs have shown great interest in parking their funds in Indian Investments. With the implementation of GST impacting positively on sectors like logistics, warehousing, automobiles, film production, DTH, multiplexes, cement etc., it will make India an attractive destination for investment into these sectors by the NRIs. NRIs would find it simpler to deal with one unified tax structure across the country. There would be no more surprises in the form of various aspects of taxation which they may not be aware of.
In sum, GST stands as one of the most significant tax reforms in India, and its successful implementation would give a strong signal to foreign investors about our ability to support business. Besides, it will enable wide-scale changes in the tax structure which will have long term positive effects on our economy. The success of GST depends essentially on two factors i.e., RTR or revenue neutral rate and secondary threshold limits which are being debated intensively. GST administration will have to be ramped-up both at the Centre & at State levels with tax officials having to change their mindsets and also educate tax payers.
Implementation of GST in effect opens up the prospect of transitioning to a world-class indirect tax compliance system, one that is fully automated and is supple enough to house changes in the tax base, rates and rules and procedures. The need of the hour for business houses is to foresee and build up alternate scenarios for the GST design and assess its impact on their accounting and compliance frameworks, cash flows, pricing strategy, supply-chain structure, organisational structure and IT systems for effective transitioning.