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How GST will transform the business landscape in India

Jan 03, 2017

The biggest indirect tax reform in India, the Goods and Services Tax (GST), is expected to come into effect next year. The efforts by various stakeholders to carve out a comprehensive tax system that does away with the cascading of myriad taxes across the country had already begun seven years ago. Since then, various modalities and structures of the GST have been widely debated among economists, business leaders, industrialists, market analysts, chartered accountants and the general populace at large. The central government and state governments have made various deliberations in order to get a consensus on different nuances of the new tax regime. Discussions by the GST council to reach a consensus on contentious issues are under way. The proposed GST law will take the shape of a dual structure where taxes can be separately administered by central and state government. Thus, it will be in line with the fiscal federalism prevalent in the country.

GST is hailed as the most significant tax reform that will exert a profound effect on the overall taxation and revenue base of the country. The new tax regime – GST will lead to a simplified, assesse-friendly tax administration system where no facet of the economy is expected to remain untouched.

Some of the ways in which the new tax system will impact the overall business landscape of the country are discussed below.

Increase the Taxation Base and Make Industry More Competitive

The revenue mix of any economy is majorly determined by the share of direct and indirect tax collections. As per recent statistics put forward by the Finance Ministry while announcing the 2016-2017 budget, total tax collection in India—direct & indirect—is currently pegged at Rs 14.6 lakh crore, of which indirect taxes contributes to around 34%. Among the total collection of indirect tax, excise tax is estimated to contribute Rs 2.8 lakh crore while Rs 2.1 lakh crore is expected to come from service tax. With the proposed GST, the entire indirect tax system in India will get an overhaul and various indirect taxes will be subsumed within the GST. In the revised estimate disclosed in the budget for 2016-17, the indirect taxes collections have exceeded revised estimates (RE) by Rs 9,885 crore, which is expected to further evolve over time.

While the GST is expected to increase tax compliance and revenue collection by the states, the share of indirect taxes is likely to soar in future. The tax base will further be broadened by a robust IT infrastructure being developed by mid and large scale organizations. As per a report by the RBI, GST will pave the way for a fiscal consolidation without states compromising on the nature of expenditure. This will bring down the cost of production and will make industry more competitive.

Read: How GST will increase the ease of doing business

Value addition across the manufacturing and supply chain

Another key impact that the GST will have on tax compliance is the wide availability of input credit for manufacturers and suppliers leading to a constant value addition across the chain. GST will ensure a seamless flow of input credit across the value chain of both goods and services and will result in better compliance by traders. The new proposed structure, unlike the current structure, is a tax only on value addition at each stage; a supplier at each stage is allowed to set off, through an inbuilt tax credit mechanism, the tax paid on the purchase of goods and services against the tax to be paid on the supply of goods and services. As a result, the end user has to bear only the tax charged by the last stakeholder in the supply chain.

Impact on Inflation

The GST will have minimal impact on inflation if the standard GST rate is at 18%. However, as per a report by a financial services company, the GST will have some effect on headline CPI (Consumer Price Index) in the first year of its implementation. GST will affect headline CPI inflation by 20-70 basis points (bps) and core CPI by 10-40 bps. However, the effective tax rate on goods which consists of around 70-75% of the CPI basket is expected to decline. All components related to services constitute around 25-30% of the CPI basket, with housing, transport and communication sector occupying a major share. Services which are not taxed constitute 12% of the CPI basket and these services are exempted under the GST regime.

Impact of GST on different sectors

  • Logistics
    The sector is highly fragmented and with GST coming into effect, eliminates the tax evasion practices by players in the unorganized sector. This will lead to cost competitiveness for organized sector. As a result, the logistics sector will witness growth opportunities thereby, boosting the overall economy of the country.
  • IT & ITeS
    Currently, an effective tax rate of 14% applies to the IT industry and with new proposed GST tax, this is expected to increase to 18-20%. A large chunk of the industry revenue comes from export of products, so after the GST implementation, these exports are expected to remain exempted.
  • Automobiles
    Currently, the automobile sector is highly taxed—the effective tax rate being between 30% and 47%. With the GST implementation, the tax rate will reduce significantly to 20-22%. As a result, this will boost the overall market demand in the automobile industry. With the removal of multiple check points of different taxes such as Octroi, the transportation time will reduce. The end-user will witness cost cutting of around 10%. However, there is clarity lacking in the model GST law on whether various dealer incentive schemes and discounts will be subjected to GST. Furthermore, clarity lacks with regard to the taxation of various cesses enjoyed by the industry such as automobile cess, NCCD, tractor cess and infrastructure cess. Read to know more on how GST will impact the automobile sector.
  • Consumer durables and FMCG
    The GST will impact consumer durables either negatively or there will be no change. Companies that enjoy tax exemptions or concession will be negatively impacted. However, companies that have not availed exemptions will be benefitted.
  • Telecom
    Currently, telecommunication services have to pay a service tax of 14% to the concerned government bodies. The rate is expected to soar to 18% under GST. The telecom companies are most likely to pass the increased tax burden on their postpaid consumers. Having said that, the easy availability of input tax credit leads to lower capex cost of telecom providers.
  • Banking and Financial Institutions
    The banking and services industry is highly regulated and one of the major impacts of GST will be the revenue earned though collateralized borrowing and lending obligation (CBLO). As per the current regime, the effective tax rate on all fee-based transactions is 14% which is expected to increase to 18%-20%. Some of the major fee-based transactions that will be charged are charges on transaction fees and processing fees. All fund based activities such as interest, investment and asset financing, and propriety trading are outside the ambit of current taxes. When the GST law comes into effect, a clear distinction should be made for fee-based and fund-based activities or else the revenue earned from the instrument CBLO will be vain.

To Sum Up…

The impact of GST on some sectors will be positive while for others it is likely to be negative or neutral. The GST regime will herald a new tax structure wherein the entire revenue recognition process goes for an overhaul. Deliberations are still under way to get clarity on taxation of some components in each industry. It is prudent to analyze case-by-case basis to ascertain the true impact. With the law due early next year, the way business is conducted at large will change forever.

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