Recently, after much deliberations India moved a step closer to implementing the Goods and Services Tax (GST), the Chief Economist Advisor (CEA) Arvind Subramanian led panel recommended a standard GST rate of 18% putting to rest the debates about what the rate would be. But yet, the battle for implementing GST, the tax which will replace a plethora of indirect taxes, including Service Tax and VAT, and improve the ease of doing business in India is far from over. The government will first have to clear the logjam in Rajya Sabha where the opposition has asked to incorporate certain modifications in the Bill which include capping the rate in the Constitution Amendment Bill itself among others. Failure to resolve these demands lead to the government scrapping the idea of introducing GST in the winter session of the parliament and this will further delay the timeline of introducing GST from April 1st, 2016.
|GST Rates as per CEA panel|
|Revenue Neutral Rate||15-15.5%|
|Lower Rate (for essential goods)||12%|
|De-merit Rate (for luxury goods)||40%|
Whether from the next fiscal year or any month in the coming year, whether the government’s version or the opposition’s, GST is going to be implemented for sure and will drastically impact how business is done in India. With the aim of simplifying the indirect tax structure in India by encompassing all the indirect taxes, GST is going to create a unified India in terms of taxation and thus will improve the ease of doing business ranking of India, something that the present government has been extensively focusing on since it took the realms.
Despite all these factors, GST comes with its fair share of complications and it is against this backdrop it becomes prudent to do a detailed study of GST’s impact across various sectors. So let’s see how GST is going to impact some major sectors:
Currently the Service Tax on majority of the services stands at 14.5% after the inclusion of the 0.5% Swach Bharat Cess. With the proposed GST rate, it is expected to increase to about 18%, thus making many services expensive, be it telephone bills, restaurant orders or ticket bookings. This would also mean that the Service Sector will have claim to credit as currently service providers are denied the claim of credit on VAT or Sales Tax, thus rendering it possible for the customers to avail this tax credit and saving their costs. Further, there will be no distinction between manufacture, services and trading for utilization of credits.
GST is going to be a game changer for the pharmaceutical industry from the supply chain perspective leading to the fact that the central sales tax (CST) will be subsumed within GST. Thus the inter-state stock transfer and sales will be indistinguishable from the tax point of view and transactions in this space will become tax neutral. This means that the C&F (Carry and Forward) distribution model currently employed by Pharma companies can be replaced with better and efficient supply chains which will save the costs that were being paid to C&F agents and this can be passed on to end consumers.
A negative is that currently several medicines are taxed at 5% and this could increase to 12% which is the proposed GST rate by CEA for essential goods, thus increasing the tax burden on the end consumer. Also currently area-based exemptions are being provided to pharma companies for setting up plants in Himachal Pradesh, Jharkhand and other locations and these benefits are likely to be scrapped under government’s exemption plans leading to increased production costs and higher burden on end consumers. Thus, the pros of supply chain efficiency have to be weighed against the cons of increased tax burden to determine whether GST is a boon or bane for the Pharmaceutical sector.
The major benefit is that the CENVAT credit that is currently denied to Telcos on expenses relating to towers or infrastructure is likely to be available to the companies with GST being a seamless tax regime. The debate around classification of activities conducted by Telcos, i.e. supply of goods such as sim cards or provision of service such as making the network available will come to rest now that a unified standard rate for Goods and Services is fixed.
The negatives are of course the higher costs to consumers, from current 14.5% service tax to 18% GST rate. Another point of concern is the Place of Supply rules under GST on which not enough clarity is provided as of yet. This would mean ambiguities on roaming where it would have to be determined which state, home or the roaming, is the consuming state and where the taxes have to be accrued. So if the place of supply rules are not appropriately worded, this could be a point of contention.
A major positive for the Auto sector is the doing away of the 2% interstate CST that auto manufacturers have to pay to sell their cars outside of the state of manufacture. This is particularly beneficial as majority of the cars are sold outside of the manufacturing state. Even the interstate procurement of auto components will be exempt from CST if GST comes into play.
The negatives for auto companies will be possible renegotiation of the state VAT/CST incentives obtained from manufacturing states such as Gujarat, Tamil Nadu etc. Another factor is the differential treatment of small cars, depending upon the engine size etc. get. If a standard GST rate comes into play for small cars as well, this would entail increased costs to the consumers.
So like Pharma, the pros of efficiencies of GST need to be weighed against the withdrawal of state tax incentives and higher tax rates to settle on the impact that GST will have on Auto sector.
FMCG industry today has a supply chain design entirely driven by stock transfers, thus involving multiple warehouses which can’t consolidate with the 2% CST applicable. GST eliminating CST means warehouses can consolidate across states but at the same time the FMCG companies have to keep in mind that the goods reach market efficiently well within time.
The flipside would be that many processed foods which fall in the lower tax bracket of 4-5% in order to promote the industry might be impacted if GST is applicable to processed foods. Even the lowest 12% rate would be a burden for such goods thus entailing higher costs for the producers which will pass on the same to consumers.
So overall GST efficiencies could be offset by higher rates for FMCG products. If the rates are in the lower 12% basket, efficiencies can flow through the value chain, but if the rate is 18%, then it could pose a problem for the industry.
Entertainment and Hospitality
GST will eliminate the multiplicity of various taxes levied in this sector. Entertainment Tax, Luxury Tax, VAT and Service Tax will all be subsumed under the single GST. These taxes being higher than the GST will make it cheaper for the consumers to avail the services of this sector. Further because of the credit between goods and services, cascading of taxes will be prevented and thereby the profits for the companies will increase.
Furthermore there are various sectors which are going to be affected by the inroads of the GST include BFSI where the services are going to get expensive;Infrastructure and Real Estate where multiplicity of taxes such as VAT, Entry Tax and Service Tax is reduced thus rendering a simplified tax structure and also ensuring smooth flow of credits through the chain, thus leading to a reduction of property prices for consumers; then there is the Textiles sector where currently there is distinction between the kinds of fibers from the taxation perspective, GST will bring in simplification with a uniform tax rate across the sector.
Overall, at this juncture it is difficult to comment whether GST is going to be a panacea for the Indian industry or not considering that the impact of the same is spread across various sectors of the economy, beneficial for some, not so for the others. We will have a concrete answer only after observing the initial run. But one thing is for sure that GST is going to create a simplified tax structure and going to abridge the way business is conducted in India. No wonder then it is so high on the expectations of the business community in the country and investors abroad as well, and rightly the government is pursuing it as one of its key reforms, for who knows, maybe GST will bring in the promised and much awaited Ache Din for the Indian business community.
- Business Standard