Hindustan Unilever expresses concern over additional tax of 1% on inter-state goods movement; experts say the GST rate of 27% would be inflationary
While extending kudos for Goods and Services Tax (GST), some consumer-related companies have raised concerns over its current format and possible repercussions on various consumer businesses.
Their key concern pertains to Clause 18 of the Bill that proposes to impose an additional tax of 1% over the GST rate for supply of goods in the course of inter-state trade/commerce, and stock transfers.
Welcoming the introduction of GST calling it a great development from the country’s point of view, P B Balaji, chief financial officer, HUL, said there are a few niggles that need to be sorted out.
“The whole 1% additional tax being charged for sales as well as stock transfers was never in the scheme of things and an area of concern. It is not in the spirit of GST,” said Balaji.
Industry leaders said they are working very closely with the government on this.
“Whatever issues are there at an industry level, we are working very closely with the authorities and the government – both state and central – to make sure there is a smooth implementation. We absolutely think it’s the right step to create one single market in India and remove all the barriers. We hope that we can finally get going on this one,” said Harish Manwani, chairman, HUL.
According to industry experts, GST would subsume many of the current taxes and usher in tax efficiencies.
Saloni Roy, senior director, Deloitte in India, however, feels that the 1% additional levy appears to be a retention of CST within the new GST regime. “There is a fear that this could be inflationary,” said Roy.
So how bad can it get for the Indian business community?
Divyesh Lapsiwala, tax partner, EY, said it would be difficult to quantify.
“It’s a point that worries companies for sure. It clearly reduces the objective/efficiency of GST and needs to be addressed,” he said, adding that the finance minister recently also said that he will ensure the cascading effect of this additional tax will not come into play.
“Which means there will be some mechanism put in place to mitigate the negative impact of this 1% additional tax. It still remains to be seen what the proposal is going to be,” he said.
Another area of concern is is the GST rate of around 27%, which could be inflationary when implemented next year.
“The finance minister himself said that the revenue neutral rate needs to be competitive and the current suggested rates are simply too high. These niggles need to be ironed out,” said HUL’s Balaji adding that the earlier businesses have a clarity around GST – what it is, how will it be implemented, what are the operational issues and when it is going to come through – the better it is for them to get prepared for it.
“The best GST is when you include everything into it, so that we have a wide base, and use that wide base to keep revenue neutral rate low, which then benefits everybody. If these niggles are ironed out, it will be a great way to grow in this country, a great way to keep the inflation low and also manage fiscal deficit,” said Balaji.
On the GST rate of 27%, Lapsiwala said there is not much clarity as yet and that if one looks at taxation of goods, a combination of excise duty (12.5%) and value-added tax (12.5%) already adds to a taxation rate of 25%. “The finance minister had said they were looking at a rate lower than 27%. Our expectation is that it will be anywhere between 20% and 22%, which is considerably lower than 25-26% we have at present. This rate, in our opinion, will lead to moderation and not inflation,” he said.
Implementation of GST, experts said, will lead to inefficiencies of taxation going away, cross credits being available across states and improvement in the return on capital employed. This is because companies will not be required to set up a warehouse in every state and operate from a regional or a central warehouse, thus capital efficiency will improve.
“All of this augurs well for the businesses and consumers particularly because India is a very competitive market. In my personal view it will not be inflationary. While there may be spike in certain aspects as the benefits will take 2-3 years to materialise,” said Lapsiwala.
Also, services may have not have a major impact. “When I look at the consumption basket, from an inflation standpoint, there are a lot of essential commodities that are exempt or continue to be exempt in GST and the rest of it may see moderate increase. Also, services do not form a big part of the consumption basket so at a personal level I don’t expect that it will be inflationary,” said Lapsiwala.