The GST is a landmark indirect tax reform which is expected to bring a harmonized tax structure in the economy. Amidst wide deliberations by state governments and the Central government, the proposed GST regime is expected to become a reality soon. The GST, proposed as a consumption-based tax, will subsume myriad indirect taxes and replace them with a dual structure. The dual structure envisages that the tax will concurrently be levied by central and state government and will consist of: Central GST (CGST) levied by Centre and State GST (SGST) levied by States. In addition, Integrated GST (IGST) is levied by the Central Government on inter-state trade or commerce. Though the tax rate is likely to be uniform but as market experts and economists opine, the impact will vary depending on sectors. Clearly there will be winners and losers and it is essential that we analyze the impact on industries on a case-by-case basis, post careful evaluation of the changes in the current taxation system.
The automobile sector is expected to emerge as a winner if the rate of taxation is below the total tax incidence pitched at a minimum of 27%. Car manufacturers will benefit due to uniformity of taxation. The inter-state procurements made by manufacturers currently suffer from 2% CST and since the GST is not an origin-based tax, the sales tax will be replaced by IGST. The dealers and manufacturers while selling the car to other states can credit the IGST they’ve paid to the state of origin. As a result, car manufactures can scale their operations and lower the prices for end-users, thereby contributing to a higher market demand. Coupled with that, since all the taxes such as input services, capital goods and manufactured products can be set off against the output liability of GST leading to an easy credit mechanism, demand for commercial vehicles may take a beating in the medium term. This is on account of increasing productivity for fleet since various local taxes will be subsumed by GST which will remove any delay in logistics.
However, many ambiguities still remain that may restrain the growth of the automobile sector. The state incentives enjoyed by auto manufacturers with large investments are likely to suffer if after the implementation of GST, the incentives are discontinued.
Another sector which will benefit immensely from GST is the logistics sector. The GST implementation is likely to reduce inter-state trade and commerce. This will lead to reduction of transit time, consolidation of supply chains and warehousing facilities. The sector is highly fragmented with a large number of small players who evade taxes. The sector will benefit from significant decrease in levies. Better tax compliance will only lead to lowering the pricing gap between unorganized and organized players, eliminating the unfair competition in the market. Various organized players will invest the gains due to the development of new logistics hubs and expand them further leading to better economic efficiency.
The FMCG sector is anticipated to witness significant impact once the GST comes into effect. The GST law will ensure a seamless flow of credits to the players in the food and beverage industry, which constitutes a major portion of FMCG. Another segment that contributes one-third of the sector is personal and household products, which will be benefitted from a change in the tax regime. The 2% central sales tax on the warehouses as origin tax will be removed altogether as GST is a consumption-based tax. As a result, the players are not likely to consolidate their multiple warehouses in the near future. However, they are expected to increase efforts to decrease the time to market (TTM) for their products.
The manufacturers of processed food are likely to suffer, since most of these products are in the lower tax bracket of 4–5%. Many procurements in the FMCG sector are done from states such as Uttaranchal and Himachal Pradesh, which enjoy total excise tax exemption. When the GST comes into practice, the manufacturers will go for refunds which will constrain the flow of working capital. Manufacturers who require non-processed raw materials that are currently exempted from taxes may suffer the most from the current tax regime. So it remains to be seen whether the prices of the FMCG products will increase or may change only marginally.
The growth of the telecom industry is constrained by several factors. The most prominent of them are the cascading effect of tax-on-tax and the lack of clarity on the classification of services. With the proposed GST, the most hardly hit sector will be the telecom services segment. Currently, the rate of service tax levied on them is just 14% which is expected to fall in the GST tax bracket of 20–22%. The hike in the tax rate is most likely to be passed on to the end consumers, mostly postpaid subscribers. So the consumers may suffer until the GST addresses this issue and mandates that the increase in tax rate is passed on the players in the value chain.
Currently, there is no mandatory audit compliance for telecom providers. However, they are mandated to go through an audit scrutiny by the service tax department. Since the proposed GST considers goods and services as equivalent entities for taxing, the providers may have to engage with separate entities, one for tax compliance and the other for audit scrutiny. Consequently, this will add to the compliance cost and may impact the revenue of the providers. As a possible consequence, charges for call rates and data usage may soar dramatically. This is relevant to mobile wallets used by leading telecom providers such as Airtel Money and Vodafone M-Pesa. The matter of inclusion or exclusion of mobile wallets under the GST is not yet clearly defined leading to the debate on its taxability. Furthermore, doubts related to interlinking charges remain. Since the place of supply of such services is yet to be determined, the point of tax incidence remains unclear. Also, telecom providers may have to consider a complete overhaul of their operating systems and business structures.
Increased availability of input tax credit for retailers will boost the sector. Currently, retailers have to bear the burden of various taxes: the CVD (Countervailing Duty) levied on import of goods, excise duty levied on goods manufactured in India and CST paid on inter-state procurements of goods. After the GST is implemented, the taxes on these transactions can be easily creditable. As a result, cascading effect on taxes would be eliminated and the supply chain will be consolidated, leading to reduction in prices of products. However, the products for which the effective tax rate is remarkably low, are expected to suffer.
Currently, there is no tax levied on any inter-state stock transfer of goods from one branch to another. As per the proposed GST, this will be taxed leading to blockage of a major chunk of working capital. Furthermore, the products given free of cost under the scheme ‘Buy one, get one free’ will be taxed under GST. Hence, all such schemes will take a backseat in the promotion strategies of the companies. Other key areas where the GST will impact the sector are taxation on sale of gift vouchers or coupons and determining the place of supply to correctly decide the states that will levy the specific tax.
The main indirect taxes applicable on the real estate sector which will be subsumed by GST are excise duty, value added tax (VAT) and service tax. According to ICRA, an independent investment information and credit rating agency, the government is expected to fix the GST rate on real estate at 18 per cent. Broadly this will have a neutral impact on the residential real estate prices. Coupled with this, the easy availability of input taxes will offset the high tax rate on the sale of various under-construction properties in different states. The gains to the end users will be determined by the interplay of the hike in the GST rate with the effective tax rate that the end users are paying currently.
While for most of the sectors the overall impact is anticipated to be positive, several issues such as continuation of exemption benefits and the place of GST tax incidence remains unclear. The issue of administrative control of tax assesses with respect to different state governments and the central government is a key factor that the GST council is yet to finalize on. These factors will decide the fate of many industry players. The manufacturers who depend on procurements of raw materials that are currently tax exempted may continue to enjoy the benefit after the GST comes into effect. Or, they may have to suffer. However, market analysts opine that even if the tax exemptions are discontinued, the government should make changes in the GST law to address the concerns of the market players so that the impact is minimal.