The GST law deeply impacts every sector of the economy; it is worthwhile to note how this impact is assessed and absorbed by each sector
The goods and services tax (GST), which would change the landscape of indirect taxation in India, is considered a panacea to several indirect tax maladies being encountered owing to the existing complex federal indirect tax structure.
The government passed the GST Constitution Amendment Bill (the GST bill) in the lower house of Parliament in December 2014. It has continued to expend substantial effort by reaching out to the opposition and states alike, assuaging the fears of revenue erosion, constantly interfacing with industry, formulating a draft GST legislation and working on back-end integration of the nationwide GST network.
While the government is awaiting passage of the GST bill in the upper house of Parliament, the finance ministry has unveiled the draft of the model GST (the GST law) post approval of the empowered committee, much ahead of the GST roll-out, reiterating its conviction in implementing GST at the earliest.
Largely, the GST law, while retaining the federal indirect tax structure, reaffirms that the basic edifice of GST is dual levy of GST, with the states empowered to levy state GST (SGST) and centre to levy central GST (CGST) on intra-state supplies of goods and services and integrated GST or IGST being imposed by the centre on import and inter-state supplies of goods and services.
The GST law, among others, provides for an elaborate mechanism for availment and utilisation of input tax credit, which is the very basis for effective implementation of GST, as the measure aims to facilitate seamless flow of credit, parameters for valuation of taxable supply, place of supply of service/goods, point of taxation to ascertain the trigger for payment of GST and also, importantly, transitional provisions.
Evidently, this deeply impacts every sector of the economy. It would be worthwhile to note how this impact is assessed and absorbed by each sector. For instance, GST being a consumption-based tax would end the tussle between two states to levy VAT on the very same e-commerce transaction. Introduction of GST would also eliminate the issues around the levy of entry tax on e-commerce transactions.
While the above are positives of GST for the e-commerce sector, on the flip side, GST law proposes to cast obligation on the marketplace to deduct tax at source out of the amount payable to the supplier of goods and services and such a marketplace is answerable to the GST authorities in case of any discrepancy in deduction. This obligation cast on a marketplace is not only burdensome, but also puts an online seller at a disadvantage in comparison to an offline seller.
On the other hand, the trading sector would be benefited due to the reduction of a cascading effect of non-dutiable taxes (such as central sales tax, octroi/local body tax, service tax), which is a pain point under the current regime.
With the rate of GST on supply of goods likely to be at 18% as against the current rate of 22%, hopefully, the benefits will be transferred to end consumers.
For sectors involved in services including information technology, the GST law attempts to end disputes around supply of software and other intangibles, while increasing the credit pool. However, ascertaining place of supply of services in the context of a pan-India contract is likely to prove a challenge.
Additionally, the rate of GST for services being 18%, as against the present rate of service tax of 15%, would mean the cost of services are likely to increase and essential services such as banking, telecommunication and insurance will become dearer.
Specific to manufacturing sector, the increased rate of GST would translate into higher working capital, impacting product pricing. The concept of excise-free zone and as well as maximum retail price valuation would be done away with under the GST regime. Further, the fate of concessional rate of duties rolled out to promote Make in India is in limbo with no clarity forthcoming on continuation of such concessions, as also the benefits afforded to export-oriented units.
It is also imperative to note that goods such as petroleum, oil and natural gas are kept outside the ambit of GST (to be included on a notified date later). This would impact the credit flow mechanism and become a cost into the system.
While GST law is silent on the levy of GST, the revenue neutral rate report has recommended a higher rate on luxury cars, much to the dismay of players in the automobile sector and if the same were to be implemented, then the luxury car sector would be adversely affected.
It is manifest that all sectors of the economy would be impacted either positively or otherwise and none would remain insulated from the effects of GST.
While the government’s commitment for an early and easy implementation of GST is evident, it is crucial that the GST bill is passed in the upcoming monsoon session of Parliament, thereby paving way for its roll-out at the earliest.