The proposed goods and services tax (GST) regime, slated to be introduced from April 1, 2016 will be a paradigm shift from the present taxation model to an advanced one. While GST is flaunted as the single largest indirect tax reform that will boost India’s GDP, its impact on the consumer is less talked about.
Under the GST regime all major indirect taxes — central excise duty, service tax and additional duties of customs at the central level; value-added tax, central sales tax, entertainment tax, luxury tax, octroi and lottery tax at the state level — will be replaced by a ‘dual GST’. The centre will administer the central GST (CGST), and the individual states will administer the state GST (SGST).
GST is expected to have a far reaching impact over trade and industry as its introduction will result in abolition of multiple taxes, removal of cascading effect of taxation and fostering a common market across the country.
GST will be charged at each stage of value addition and the supplier will be able to offset the levy through a tax credit mechanism. However, GST being an indirect tax, the ultimate burden has to be borne by the consumer. The tax content in the final product or service price would therefore determine the impact of GST on the consumer.
Probably, GST on goods will comprise of at least two nominal rates apart from specified goods that would be exempt.
Currently, we have an excise duty of 12.5 per cent on majority of goods (lower rates of six per cent on some) and a VAT rate of 4-5 per cent for merit goods and 12.5-14.5 per cent on other goods. Thus, the total tax incidence for goods could range between 10 per cent to over 25 per cent. Services are presently taxed only by the centre at 12.36 per cent, that will to be subjected to 14 per cent with effect from June 1 2015.
Since, with the introduction of GST all these rates will blend into two rates (lower rate and standard rate), there will be a positive or negative impact on every product. It is also expected that the excise exemption, which apply on 300 product categories, will be pruned to around 100 to match with the exemptions under the state VAT regime.
Further, the Constitution amendment bill which is pending Rajya Sabha clearance also proposes to impose an additional tax of one per cent on supply of goods in the course of inter-state trade for an initial period of two years of operation of the GST regime, which will be assigned to the state from where the supply originates. Since, no credit will be available for the additional tax, it will add to the cost of goods. If the goods are sold/stock transferred to 2-3 states before their final sale there will be an additional impact of 2-3 per cent on this account alone.
In spite of the fact that the tax incidence on some goods might rise due to the increase in the effective rate, businesses are bound to gain due to free flow of credits, no tax cascading and lower compliance costs under GST. Presently, no credit is available for CST, while in the proposed regime businesses will be able to avail credit of IGST on inter-state supply. Trading houses are expected to gain as they will be able to avail credit of CGST as against the excise duty that currently forms part of the cost of their product.
The question whether the end consumer of goods will benefit from GST depends on the rates of dual GST and how soon the businesses will pass on the not so visible benefits of cost reduction due to increased credit availability, no cascading of taxes and lower cost of compliances to the end consumers.
The service sector will be adversely affected under the GST regime. Presently, services are taxed only by the centre. Under the GST regime, services will be taxed by the centre and the states, leading to multiple compliances and consequent increase in compliance costs. More importantly the rate of service tax is expected to be much higher than the present level. As consumers of services, one will feel the heat directly by way of increased telephone bills, higher cost of dining in hotels, increase in air travel cost, and increase in costs of almost all services consumed. Most of the services are taxed under the negative list regime and will continue to be taxed under GST as well, albeit at a higher rate.
While for the consumers of goods it will be a mixed bag, for the service consumers, the impact of GST is expected to be adverse. As to how the proposed GST will impact the ultimate consumer will depend amongst other factors, on the rate of dual GST.A moderate standard rate of GST at around 18 per cent for goods and for services at a lower rate of 12-14 per cent, same as applicable for merit goods is what the industry is looking forward to. At these rates the end consumers would not be impacted much, but at the same time the government revenues are expected to go up due to better compliances.