April 1, 2017 deadline is ‘challenging’, but going by the outcomes of the first meeting of the Council, it is clearly doable: FM Arun Jaitley
The GST tax introduced with the motive of “ one nation, one tax”, which will subsume all the indirect taxes currently levied in the country, is expected to bring about the best for economic management of the country and also will satisfy the concerns arising from the federal form of the country.
Within a fortnight of President Pranab Mukherjee signing off on the 122nd Constitution Amendment Bill to introduce the Goods and Services Tax (GST) regime, work on the next steps has begun. The GST Council, led by the Union Finance Minister and with representatives from all States, had its first meeting on September 22-23, flagging off the process of determining the nitty-gritty of the new indirect tax system and resolving differences on crucial first-principle issues. Time is of the essence, as just six months remain for the April 1, 2017 deadline that the Centre has set for ringing in the GST. Finance Minister Arun Jaitley has admitted that the deadline is ‘challenging’, but going by the outcomes of the first meeting of the Council, it is clearly doable.
What is GST Bill ?
The Goods and Services Tax Bill or GST Bill, officially known as The Constitution (One Hundred and twenty second Amendment) Bill, 2014, proposes a national Value added Tax to be implemented in India from 1 April 2017. The full form of GST is Goods and Services tax. So, it is also called as Goods and Services Tax Bill. This Bill is one of the remarkable changes in India’s Indirect tax changes since the beginning of the economy. GST is a tax levied when consumer buys any good or service. There are three components of GST-
1. Central GST (CGST) – it will be Levied by Centre
2. State GST (SGST) – It will be levied by State
3. Integrated GST (IGST) – It will be levied by Central Government on Intestate supply of Good and Services Remarkable thing about GST is that it avoids “cascading of taxes”.
How GST is different from other taxes
Currently there are many indirect taxes. We all know about Service Tax, Vat, Luxury tax etc. You can see these taxes whenever you check out from a hotel and whenever you pay the bill at restaurant. The bill they offer to you contains these taxes.
? Now, what GST does is that it combines all these taxes into one, i.e. subsumes all other indirect taxes. It is done for all the Central level and State level taxes.
? The nature of GST is that it taxes only the final customer. Hence the cascading of taxes is avoided and production costs are cut down.
Following is the list of the taxes that are subsumed by GST –
Central Level Taxes – Central Excise Duty, Additional Excise Duty, Service Tax, Countervailing Duty and special Additional Duty of Customs State Level Taxes – State Value Added Tax or Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase tax, Luxury Tax, Taxes on Lottery, Betting and Gambling So, this means that GST clubs almost all indirect taxes together that are levied by central and State Governments.
Exclusions in GST
Following products are excluded from GST –
? Petroleum Products
? Alcoholic Beverages
GST impact across sectors
GST will eliminate multiple levies. It will also allow deeper penetration of digital services.
IT companies can have several delivery centres and offices working together to service a single contract. With GST, companies might require each centre to generate a separate invoice to every contracting party. Duty on manufactured goods is going to go up from existing 1415% to 18%, which means the cost of electronics from mobile phones to laptopswill rise.
Companies could generate substantial savings in logistics and distribution costs as the need for multiple ales depots will be eliminated. FMCG companies pay nearly 2425% including excise duty, VAT and entry tax. GST at 1719% could yield significant reduction in taxes. Warehouse rationalisation and reduction of overall tax rates, is expected to generate saving which could cumulatively range between 200 300bps. Key beneficiaries : Hindustan Unilever, Colgate, GSK, Asian Paints.
If the recommended 40% "sin/demerit" GST for aerated beverages and tobacco products is levied, then prices may increase by over 20%. Food companies: many see increase in effective tax as many companies enjoy concessional rate of excise.
GST will help create a single unified market across India and allow free movement and supply of goods in every part of the country. It will also eliminate the cascading effect of taxes on customers which will bring efficiency in product costs.
The tax collection at source (TCS) guidelines in the GST regime will increase administration, documentation workload for ecommerce firms and push up costs.
Handset prices likely to come down, even out across states. Manufacturers are also likely to pass on to consumers cost benefits they will get from consolidating their warehouses and efficiently managing inventory. For handset makers, GST will bring in ease of doing business as they may no longer need to set up state specific entities and transfer stocks to them and invest heavily into logistics of creating warehouses in each state across the country.
Call charges, data rates will go up if tax rate in the GST regime exceeds 15%. Tower firms won't be able to set off their input duty liabilities if petroproducts continue to stay outside GST framework. Negative for Bharti Airtel, Idea and Reliance Comm.
On road price of vehicles could drop by 8%, as per a report by Motilal Oswal Securities. Lower prices can be onstrued as indirect stimulus to boost volumes. Key beneficiaries: Maruti Suzuki, M&M? Eicher motors' margins may expand.
Demand for commercial vehicles may be hit in the medium term. GST will subsume local taxes, reduce time t checkposts, ease logistics hurdles. With fleet productivity increasing, operators may not feel the need to expand midterm.
DTH, film producers and multiplex players are levied service tax as well as entertainment tax, GST will bring major change and uniformity in businesses. Taxes could go down by 24%. Multiplex chains will save on revenues as there will be a more uniform tax, unlike current high rate of entertainment tax levied by different states. It may lower the average ticket price, and increase the footfalls in multiplexes. GST will be a big boon to film producers and studios that currently pay service tax on most of their cost, but cannot charge input credit on creative services (payments to artists etc) as they fall under the negative list. Under GST, they will be able to claim credit of these services also, which will help is lowering the overall cost. Key neneficiaries Dish TV, PVR.
Insurance policies: life, health and motor will begin to cost more from April 2017 as taxes will go up by up to 300 basis points.
Flying to become expensive, as service tax will be replaced by GST. Service tax on fares currently range between 6% and 9% (depending on the class of travel). With GST, the rate will surpass 15%, if not 18%, effectively doubling the tax rate.
The effective rate of tax for cement companies is now 25%. If GST rates are fixed at 1820% then the overall tax incidence will be lower GST IS expected to lead to savings in transportation cost, which currently comprises up to 2025% of total revenue. One common market will bring down the number of depots in the country. Ultratech states that its depots will come down to 100 from 550 at present. Key beneficiaries : Pan India players such as UltraTech, ACC, Ambuja and Shree Cement.
The GST Advantage for economy as a whole
1. Life gets simpler GST will replace 17 indirect tax levies and compliance costs will fall
2. Revenue will get a boost Evasion set to drop Input tax credit will encourage suppliers to pay taxes States and Centre will have dual oversight The number of taxexempt goods will decline
3. A common market It's currently fragmented along state lines, pushing costs up 2030%
4. Logistics, inventory costs will fall Checks at state borders slow movement of trucks. In India, they travel 280 km a day?? compared with 800 km in the US
5. Investment boost for many capital goods, input tax credit is not available. Full input tax credit under GST will mean a 1214% drop in the cost of capital goods. Expected: A 6% rise in capital goods investment, 2% overall.
6. Make in India a) Manufacturing will get more competitive as GST addresses cascading of tax, interstate tax, and high logistics costs and fragmented market b) Increased protection from imports as GST provides for appropriate countervailing duty. Also read: GST impact across sectors: Take a look at the winners and losers
7. Less developed states get a lift The current 2% interstate levy means production is kept within a state. Under the GST national market, this can be dispersed, creating opportunities for others
8. Manufactured goods could become cheaper Lower logistics and tax costs
9. GDP lift HSBC estimates an 80 basis point rise in GDP growth over 35 years. NCAER pegs this at 0.91.7% thanks to the elimination of tax cascading
10. Freeing up online State restrictions and levies have complicated ecommerce. Some sellers do not even ship to particular states. All this will end with GST Potential Pitfalls Once the Upper House passes the amendment, there's a long way to go and much work to be done before the government's April 1, 2017, deadline can be met.
In single line we can say that GST will simplify administration, improve compliance, remove distortions in production, trade and consumption
Although there are noticeable benefits of GST, it doesn’t mean that it is perfect. There are some disadvantages too, which can’t be ignored –
? The tax on services would go from 14 to 20% after the implementation of GST
? The Tax on retails will almost get doubled
? The tax on imported Goods will be around 6%
? There will be control on every system by the Central and State Governments
The actual regime may not be the best possible Too many exemptions could undermine the levy Goods like petroleum, alcohol and tobacco may be excluded. A high tax rate would stoke inflation as service taxes will rise more steeply Fiscal stress if expected collection efficiency doesn't materialize early.
Goods and Services Tax and Consumer
It is understood that the design of GST itself will lead to substantial benefits accruing to end consumers. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with setoff benefits at all the previous stages. Today due to multiple indirect taxes being levied by the Centre and State, with incomplete or no input tax credits available at progressive stages of value addition, the cost of most goods and services in the country are laden with many hidden taxes. Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.
Further there will be relief in overall tax burden. This is because under the GST regime, the entire supply chain will be efficient leading to gains and prevention of leakages. This will result in the overall tax burden on most commodities to come down, which will benefit consumers. This will be a question as GST will be a game changer for economy or not. The full benefits can only come when there are minimum exemption and minimum slabs of taxation. However a country like India where there are different items for consumption for poor, the middle class and the rich, a single rate of GST may not be a possibility now. However the gains from the proposed GST regime are enormous.