The Constitution Amendment Bill for Good and Services Tax (GST) was passed in the Parliament; both Rajya Sabha and the Lok Sabha on 3rd and 8th August 2016 respectively. President Pranab Mukherjee has given his assent to GST bill on 8th September 2016, a major step towards rolling out the new indirect tax regime which the current government wants to bring into effect from 1 April 2017. With the President’s assent, the focus now shifts to enabling the Acts, which have to be passed in the Centre and the states. Eighteen of the country’s 31 states (Assam, Bihar, Jharkhand, Chhattisgarh, Himachal Pradesh, Gujarat, Madhya Pradesh, Delhi, Nagaland, Maharashtra, Haryana, Sikkim, Mizoram, Telangana, Goa, Odisha, Andhra Pradesh and Rajasthan) have already ratified the GST which meets the law for a constitutional amendment bill requiring ratification from 50 percent of the states.
The Goods and Services Tax, (GST) is proposed to be a comprehensive indirect tax levy on the manufacture, sale and consumption of goods and services at the national level. It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. GST which is a value added tax will be levied at all points in the supply chain but credit will be allowed for the taxes paid on inputs (used in making the supply) acquired.
Considering the federal structure of India, it is proposed that GST be levied concurrently by the Centre (CGST) and the States (SGST). The tax base and other essential design features would be common between CGST and SGST, across SGSTs for the individual States. Both CGST and SGST would be levied on the basis of the destination principle*. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-State transactions within India, the State tax would apply in the State of destination as opposed to that of origin. Inter-State supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the destination state).
In addition to the GST, with respect to the supply of goods, an additional tax of up to 1% has been proposed to be levied by the Centre. The revenue from this tax is to be assigned to the origin states. This tax is proposed to be levied for initial two years or a longer period, as recommended by the GST Council.
Benefits of GST
GST has been envisaged as a more efficient tax system, neutral in its application and attractive by the way it will be distributed. The advantages of GST are:
- Wider tax base, necessary for lowering the tax rates and eliminating classification disputes.
- Elimination of multiplicity of taxes and their spill over effects.
- Rationalization of tax structure and simplification of compliance procedures.
- Harmonization of center and State tax administrations, which would reduce duplication and compliance costs.
- Automation of compliance procedures to reduce errors and increase efficiency.
Taxes to be subsumed
GST would replace most indirect taxes currently in place such as:
How will GST affect various sectors?
Consumer Goods: The effective rate applicable to the sector is likely to come down from 25% – 27% to 18% – 20%. Coupled with reduction in multiplicity of taxes and cross utilisation of credit, we shall witness a positive impact on the prices in the sector for the end consumer. In addition there is also a possibility for the sector to gain logistics efficiency by consolidation of warehouses/stocking points.
Information Technology (IT): GST will eliminate multiple levies allowing deeper penetration of digital services. IT companies can have several delivery centres and offices working together to service a single contract. With GST, companies might require each centre to generate a separate invoice to every contracting party. Duty on manufactured goods is going to go up from existing 14% -15% to 18%, which means the cost of electronics from mobile phones to laptops will rise.
Telecom: Handset prices are likely to come down and even out across states. Manufacturers are also likely to pass on to consumers cost benefits they will get from consolidating their warehouses and efficiently managing inventory. For handset makers, GST will bring in ease of doing business as they may no longer need to set up state specific entities and transfer stocks to them and invest heavily into logistics of creating warehouses in each state across the country.
In comparison to the current indirect tax regime wherein the tax rate applicable on telecom services is low i.e. 15%, it is expected that tax rate under GST shall rise to around 18%-20%. From a compliance perspective, there shall be a paradigm shift for telecom operators as they will be required to undertake State wise compliance as against centralised compliances being currently undertaken, resulting in significant burden on the telecom operators.
Automotive: It is expected that there shall be a decrease in the tax rates for the automobile sector, from 25% – 40% to 18% – 20% impacting the price of the final products. Further, multiple taxes which are applicable on automobiles such as excise duty, VAT/ CST, entry tax, octroi shall be subsumed in GST reducing compliance burden. On-road price of vehicles could drop by 8% acting as an indirect stimulus to boost volumes.
Demand for commercial vehicles may go up in the medium term. GST will subsume local taxes, reduce time at check-posts, and ease logistics hurdles.
Real Estate: Transfer of (completed) properties may continue to be outside the purview of GST and be liable only to applicable stamp duties.
In case this sector is brought within the ambit of GST, it is likely to result in transparency, which will significantly reduce tax evasion through more efficient transaction-tracking methods, and improved enforcement and compliance. Since GST may be levied on a single value, the current issue of levying tax on tax (VAT on central excise duty) is likely to be removed. At present, developers pay various non-creditable taxes on supplies. GST may replace these multiple taxes with a single tax; credit on supplies may also be available, thus reducing costs for all players. However, if real estate output is exempted, then input GST credit could be a substantial cost for the sector, resulting in higher costs to end consumers.
Healthcare: The current inverted duty structure in this industry adversely affects domestic manufacturers since it makes cost of inputs being higher than output. This in turn discourages investment. GST may either remove the inverted duty structure or allow refund of accumulated credit. This would be a boon for this industry and can act as its growth catalyst.
The current cascading tax structure on import duty makes it expensive for the industry to import machinery. GST is likely to reduce this cost.
This sector enjoys several tax exemptions and benefits. It is still not clear whether these benefits will continue under GST. Health insurance and diagnostic centres, which are mainly service-oriented, may fall under higher tax rates, thereby making such services more expensive for consumers.
Banking: Under the GST regime, the tax rates are expected to increase from 15% to 18%-20% in comparison to current indirect tax regime. The same may be coupled with efficiency in credits on inputs. The major impact area for the sector shall be from a compliance perspective, where there is a likelihood of significant increase from centralised compliances to decentralised State wise compliances. GST may make things cumbersome as financial service providers may be required to adhere to compliances across multiple states instead of the current single, centralised registration compliances. Also, as GST is a destination-based tax, it might be a challenge to determine the destination of certain services (at present, services are taxed at the place of rendering the service). This may lead to a difficulty in determining state GST, central GST or inter-state GST on B2B and B2C transactions.
As per the recommendations by the banking industry interest on loans, trading in securities, foreign currency and retail services should not come under GST. It is still to be seen whether these recommendations will be accepted.
Travel, tourism and hospitality: India’s travel, tourism and hospitality industries have multiple taxes, levied by both the centre and the states. It is expected that under GST, supplies of hotels and restaurants will be subjected to a single tax. At present, no credit is available on input services related to renovation or construction of hotels and resorts. This is expected to change under GST. R&D cess, payable on franchise fees and technical know-how, is likely to be subsumed under GST, thus simplifying compliance procedures and reducing multiple taxes. However, it is unclear whether various benefits available under the existing Foreign Trade Policy will continue under GST. If such benefits are provided, input credit may not be available, resulting in higher costs.
On the whole, GST is likely to eliminate multiplicity of taxes and lack of credits. However, it may also lead to increase in tax rates.
Airlines: Flying to become expensive, as service tax will be replaced by GST. Service tax on fares currently ranges between 6% and 9% (depending on the class of travel). With GST, the rate will surpass 15%, if not 18%, effectively doubling the tax rate. Can we add an impact? Bring down passenger traffic? Increase rail?
Media and Entertainment: DTH, film producers and multiplex players are charged service tax as well as entertainment tax, GST will bring major change and uniformity in businesses. Taxes could go down by 2-4%. Multiplex chains will save on revenues as there will be a more uniform tax, unlike current high rate of entertainment tax levied by different states. It may lower the average ticket price, and increase the footfalls in multiplexes. GST will be a big boon to film producers and studios that currently pay.
Summary of the Key Business Impacts of GST
The key imperatives for companies are:
- Understand key areas of impact in their business.
- Prepare different scenarios for the design and application of GST.
- Continually track policy development regarding GST and update prepared scenarios.
- Identify any areas of adverse impact and prepare contingency measures.
- Identify issues and concerns requiring representation to authorities and develop a strategy for effective advocacy.
GST will be a game changing reform for the Indian economy as it will create a common Indian market, reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system. GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.
In terms of growth, price, current account deficit and budget balance, the macroeconomic impact due to the introduction of GST will be significant. GST will be a shift from income based tax to consumption based tax and this will provide substantial boost to source of government revenue from a flourishing service sector of today’s India. A short lived limited price impact is expected in the form of inflation with the introduction of GST. However, a larger impact is expected on the administrative compliance cost of GST which is likely to increase tax revenue thus reducing fiscal deficit.