GST tax structure ready; how will it impact economy and various sectors

industrie.jpg

The passage of the Constitutional Amendment Bill on GST has paved the way for introduction of GST in India, likely in H1FY18. The need for GST has been felt because under the current indirect tax structure 1) tax barriers have fragmented the Indian market, 2) cascading effects of taxes on cost have made indigenous manufacture less attractive, 3) complex multiple taxes have raised cost of compliance.

The GST Council has finalised a four-tier GST tax structure of 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.

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.

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’.

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

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.

As part of GST implementation, service tax is expected to go up from the current levels of 14.5 per cent, which will be negative for service companies in airlines, telecom, insurance, etc., in terms of demand impact.

1. An important fallout 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 per cent would be negative versus expectations.

4. Services sector, like telecom could face marginally negative impact from the higher service tax rate of 18 per cent (likely) versus 15 per cent currently.

However macro benefits emanating from implementing GST far outreach the negatives, it is also a significant change communicating to the world at large that we are focused on one path for economic progress.

(Rao is the Managing Director of Kotak Securities. Views expressed in this column are his own and do not represent those of ETMarkets.com)

Source: http://economictimes.indiatimes.com/markets/stocks/news/gst-tax-structure-ready-how-will-it-impact-economy-and-various-sectors/articleshow/57355477.cms

Share this post

Leave a Reply

Your email address will not be published.

Solve this and then Post comment * Time limit is exhausted. Please reload CAPTCHA.

scroll to top