The proposed Goods & Services Tax (GST) is eliciting lot of reaction from taxation experts because of its cross-section consequence on industry. An analysis of the GST impact on Goa and Goan businesses, by Santosh R Kenkre*
Recently trade body, ASSOCHAM held a seminar in Pune on Goods and Service Tax (GST) attended by top government officials and private sector experts. The seminar and my other sources gave me an initial insight into the single biggest taxation reform approaching in India. Industry and businesses across the country will have to deal with a single unified tax instead of a multiple indirect taxes. It is most fundamental change in the tax system that is expected to come into effect from April 1 2016. The proposed tax could come anytime in the course of the year 2016, is my opinion.
How will GST affect industry at large? And what is GST? To explain, presently, goods are taxed primarily by Central Excise and Sales Tax (VAT) whereas services are taxed under service tax. In the proposed regime of GST goods as well as services will be charged a single tax, viz. GST. In the process most of the taxes (about 10) that are levied today will be extinct.
GST implications are on tax revenues earned by a state. As such maximum revenues will be earned by states which consume more goods or services. For sale within the state, GST has to be paid, rate of which is expected to be about 20 per cent. It will be known as the ‘standard’ rate. Discussions are ongoing and finally this rate may even be more than 20 per cent. However, precious metals will be charged very less GST rate and further a concessional rate will be charged for goods etc. of basic importance.
For a dealer the threshold limit (for GST being applicable) is expected to be annual turnover of goods and services of about Rs 25 lakhs. For small traders and small units the composition limit of annual turnover is expected to be about Rs75 lacs and rate of composition tax is expected to be half percent. GST will not only affect producers but it will also impact traders, service providers, small and big dealers and the supply chain of goods and services. Traders will have to charge GST on their sales bills. If this GST is about 20 per cent (standard rate) it can appear to be a huge amount to the customer. But the trader will get credit (input tax credit) for entire GST paid earlier by all viz. the manufacturer and other suppliers. Therefore, in the light of this credit availability, the trader will have to reduce his basic price. Today traders cannot claim input tax credit in relation to fixed Assets and administrative expenses, but in GST regime, they can claim such credit, which will also help them to reduce the price of their goods.
In case of service providers they too will have to charge GST of about 20 per cent to their clients for services. Aforesaid input tax credit will be available also to them and hence they will have to reduce their prices/fees so as not to upset the clients. But good thing is that many of the clients can claim input tax credit on GST charged by the service provider and thus the clients may not mind paying the GST.
In a major expected relief to small dealers, all dealers in goods and service providers, having annual turnover upto Rs.1.50 crores, will not have to deal with central GST authorities. They will have to deal with only local GST authorities i.e. sales tax/VAT department of Goa. However, dealers with annual turnover above Rs.1.50 crores will have to deal with the said local authorities and also with central authority (presently customs/central excise Dept.)
Implication of GST on dealers is that they must choose suppliers/service providers well. Since dealers’ act of taking credit of input tax on purchases, etc., is important, dealers have to choose their suppliers or service providers well. Thus automatically, rogue suppliers, careless suppliers will be out of business, since they will be blacklisted. For continuing defaults, in GST regime, dealers may be blacklisted.
GST impact on Goa and Goans
In my humble opinion, Goa will get a lot of revenue from the new tax for reasons of it being a consuming state. Though Goa population is small its per capita income and thus per capita expenditure/consumption is very high. Further Goa has huge tourist inflows who are also consumers. Since GST is a consumption based tax, a lot of the revenue through the proposed tax will come to Goa due to the said high consumption.
For example, Goans are big consumers of vehicles, cell phone handsets, clothes, luxury goods, liquor, etc. Entire taxes on these goods, including central excise (which is tax on production of these goods) will later come to the local government as GST. Further, sales tax, excise duty etc, in respect of “online sales” in Goa (chiefly from Bangalore) will come to Goa as GST. Further, tax on what tourists buy/consume in Goa will fully go to Goa Govt. in GST regime.
Another major game changer for Goa will be tax on services. Firstly let us talk about services in Goa provided by major suppliers from Mumbai etc. A lot of these services are consumed in Goa eg. banking, insurance, internet, mobile services, phone services, TV broadcasting services, etc. But the respective service tax thereon is paid mostly in Mumbai where the head offices of big supplier companies are located. With the new unified tax system coming in force all these services will come to the government as GST.
In case of Goa based service providers. Today, service tax is paid by all professionals/ service providers, contractors who are based in Goa, in respect of their services consumed in Goa. But all this service tax goes fully to central govt. In GST regime, all such tax will come to the state government as GST.
Impact on large industries with manufacturing plant in Goa
Goa has several large industries who also have presence in other states. Currently from most such manufacturing industries the only tax revenue received is entry tax (which will be extinct in GST regime). Manufacturing industries pay central excise (upon production of goods) to the central government. Further almost 95 per cent of their production is transferred to their branches in other states, on which the government here gets nothing.
Therefore, in GST regime contribution to the government by such industries will not reduce as such. Instead, central excise (which will be GST later) on about 5 per cent of goods which they manufacture and sell within will accrue to Goa govt. This revenue will be more than the loss which will be caused on extinction of the said entry tax in GST regime.
Industries here which sell to customers in other states, today, pay two per cent Central Sales Tax (CST) to the Goa government. In GST regime they will pay the government only one per cent in the form of additional tax which is like CST. But, impact of this will not be much.
One good news for Goa as far as existing taxes are concerned is that since VAT on petroleum products will continue, about 50 per cent of Goa’s taxes will be protected.
Price of goods and services
Now, the most important question which concerns the common man is will the am aadmi stand to gain or lose from the new tax. Will prices of goods decrease or increase under the new regime? My answer to that is, in the short run the prices may increase but in the long run the prices are likely to stabilize or decrease. Reasons are as follows:
►Central Govt. is working on a revenue neutral rate (RNR) of GST. RNR means a rate of GST, wherein the government neither loses any revenue nor gains additional revenue in GST regime, as compared to current tax regime. Such revenue neutral rate may cause prices to remain steady. Nonetheless, some prices may increase and some may decrease.
►Tax evaders/black economy will be checkmated In GST regime and more goods will come in the market/organized sector and cause prices to fall. In fact, in view of rising tax revenue, the government may also be inclined to reduce GST rate which may further reduce prices. More revenue to government will enable it to increase welfare measures for public at large.
►Unlike present day in GST regime, manufacturers will get input tax credit on all taxes (except one per cent additional tax) paid by them thereby reducing their cost, which will prompt them to reduce prices of their goods. Their cost can further reduce since in GST regime, they will be able to develop more suppliers in the market. This is since, any suppliers/vendor who is out of GST framework, will lose out and hence all suppliers would like to be in GST framework. Today, there is a cascading effect of tax (viz. tax payable on tax). For instance VAT is also payable on central excise. This will not be the case in GST regime and hence prices will come down.
*Santosh Kenkre is a chartered accountant and vice chairman of the Economic Development Corporation (EDC)