GST AND THE ROAD AHEAD

Termed as historic, the passage of Goods and Services Tax or GST Constitution Amendment Bill in Rajya Sabha will not only unite the country with one taxation rate but also empower states and increase their revenues. Although it is not very clear at this stage what will be the GST rate, there were requests to cap it at 18%. The Constitution (122nd) Amendment Bill, 2014 for Goods and Services Tax got passed with an absolute majority in the Rajya Sabha after the Union government dropped the contentious 1% additional inter-state tax and also agreed to pay full compensation to the states for five years towards revenue loss if any.

What is GST?

Dr. Sunil Gupta

GST is envisaged to be a single umbrella tax that will replace multiple state and central levies. It is a tax on each and every economic activity, namely `supply of goods’ and `supply of services’, undertaken in the distribution chain. Aimed at simplifying the tax regime, GST will thus subsume all the indirect taxes like excise duty, service tax, Countervailing or Additional Customs Duty, Special Additional Duty of Customs, etc levied by the Centre and State.

Theoretically, GST is a value added tax levied on the intrinsic value of goods and services, designed to give credit input stage taxes to the entire distribution chain. As a consequence, the ultimate consumer bears the entire tax burden. When implemented, the single unified value-added tax system will help India transition into the world’s biggest single market. Proper functioning of all the aspects of CGST (Central GST) and SGST (State GST) are crucial for the success of GST.

Sectors that will benefit from one-nation-one tax regime

Automotive companies may see a demand surge if vehicle prices decline 8-10% because of the GST, according to a report released by Motilal Oswal.

FMCG is also considered a clear winner under the new tax regime as GST will remove multiple sales depots. This will result in enhanced savings in logistics and distribution costs and also see gains from warehouse rationalization. Currently, FMCG companies pay a huge chunk in indirect taxes, which will get significantly reduced.

E-commerce, similarly, will become cost-effective post GST since goods can move freely between states. With the elimination of cascading impact, cost at the final destination will be much lower.

Media, such as multiplex operators and DTH providers will see happy days ahead. Multiplex companies currently shell out close to 25% of the ARPU (average revenue per user) in taxes. GST is expected to reduce entertainment cost, VAT on F&B and service tax on input costs.

Cement manufacturers are likely to shell out much lower than the current 25% effective tax once GST is implemented. Transportation charges, which make up over 20% of cement companies’ revenues, will fall sharply under GST.

The Road Ahead

The most crucial point for GST implementation is meeting the deadline of April 1, 2017.  Let us explore some of the important facets below.

1. The industries and businesses are looking forward to a GST rate of 18%. But the government is not ready to commit a number. If GST rates are finalized higher, say 20%, the States are likely to cry foul over revenue losses. The matter will be debated at the GST Council. The rate will also depend on the list of exempted items and demerit commodities, which is yet to be finalized.
2. For the bill to become law, States will have to agree to the proposals enlisted in the Bill. Although a consensus has emerged between the two parties (the Centre and the States) to raise the revenue threshold under the new tax law to Rs 25 lakh, we will have to wait for the eventual decision.
3. Mindset change will play a prominent role going ahead with GST. Not only is the government required to embark on a humongous staff training exercise at the Central and State level, but also adopt a strategy to include the industry and trade of all sizes in the new tax net.
4. The current proposal under GST exhibits a sharp spike in tax rates for the Services sector. But the government cannot allow a high level of taxation on such an important sector and is likely to look for ways to ease it out while finalizing the rate structure.
5. There is a strong plea to bring CGST and IGST bills as finance bills, but the government is reluctant to make a promise.
6. At the current stage, it is not entirely clear how will cross empowerment of the two parties work. There are talks to impose a threshold limit of Rs 25 crore and do away with dual control. Only in due course of time, we will know if the states are willing to accept such a proposal.
7. In future, we may also see the rationalization of various tax departments. The Central Board of Excise and Customs (CBEC) looks after custom, excise and service tax department. Thus, the CBEC will need to be revamped once the GST is legislated.
8. Compensation aspect of GST is what thawed the earlier bottleneck. The States had rejected the Standing Committee recommendation of a staggered payout plan for five years and won the argument for full compensation.
9. The model GST law also fueled speculations among brokers, mutual funds and retail investors that transactions in the capital market may invite levy of additional tax. The way it is worded, securities do appear to fall under the ambit of model law.

Conclusion

Since the passing of the Bill in Rajya Sabha, there has been an endless debate regarding the implementation of the GST. Here, it is important to note that many states offer tax benefits to bring in manufacturing units. It is not yet clear as to what will happen to such incentives in the GST era. Similarly, one is not sure if special economic zone will continue to be relevant once GST is implemented.

Termed as historic, the passage of Goods and Services Tax or GST Constitution Amendment Bill in Rajya Sabha will not only unite the country with one taxation rate but also empower states and increase their revenues. Although it is not very clear at this stage what will be the GST rate, there were requests to cap it at 18%. The Constitution (122nd) Amendment Bill, 2014 for Goods and Services Tax got passed with an absolute majority in the Rajya Sabha after the Union government dropped the contentious 1% additional inter-state tax and also agreed to pay full compensation to the states for five years towards revenue loss if any.

What is GST?

Dr. Sunil Gupta

GST is envisaged to be a single umbrella tax that will replace multiple state and central levies. It is a tax on each and every economic activity, namely `supply of goods’ and `supply of services’, undertaken in the distribution chain. Aimed at simplifying the tax regime, GST will thus subsume all the indirect taxes like excise duty, service tax, Countervailing or Additional Customs Duty, Special Additional Duty of Customs, etc levied by the Centre and State.

Theoretically, GST is a value added tax levied on the intrinsic value of goods and services, designed to give credit input stage taxes to the entire distribution chain. As a consequence, the ultimate consumer bears the entire tax burden. When implemented, the single unified value-added tax system will help India transition into the world’s biggest single market. Proper functioning of all the aspects of CGST (Central GST) and SGST (State GST) are crucial for the success of GST.

Sectors that will benefit from one-nation-one tax regime

Automotive companies may see a demand surge if vehicle prices decline 8-10% because of the GST, according to a report released by Motilal Oswal.

FMCG is also considered a clear winner under the new tax regime as GST will remove multiple sales depots. This will result in enhanced savings in logistics and distribution costs and also see gains from warehouse rationalization. Currently, FMCG companies pay a huge chunk in indirect taxes, which will get significantly reduced.

E-commerce, similarly, will become cost-effective post GST since goods can move freely between states. With the elimination of cascading impact, cost at the final destination will be much lower.

Media, such as multiplex operators and DTH providers will see happy days ahead. Multiplex companies currently shell out close to 25% of the ARPU (average revenue per user) in taxes. GST is expected to reduce entertainment cost, VAT on F&B and service tax on input costs.

Cement manufacturers are likely to shell out much lower than the current 25% effective tax once GST is implemented. Transportation charges, which make up over 20% of cement companies’ revenues, will fall sharply under GST.

The Road Ahead

The most crucial point for GST implementation is meeting the deadline of April 1, 2017.  Let us explore some of the important facets below.

1. The industries and businesses are looking forward to a GST rate of 18%. But the government is not ready to commit a number. If GST rates are finalized higher, say 20%, the States are likely to cry foul over revenue losses. The matter will be debated at the GST Council. The rate will also depend on the list of exempted items and demerit commodities, which is yet to be finalized.
2. For the bill to become law, States will have to agree to the proposals enlisted in the Bill. Although a consensus has emerged between the two parties (the Centre and the States) to raise the revenue threshold under the new tax law to Rs 25 lakh, we will have to wait for the eventual decision.
3. Mindset change will play a prominent role going ahead with GST. Not only is the government required to embark on a humongous staff training exercise at the Central and State level, but also adopt a strategy to include the industry and trade of all sizes in the new tax net.
4. The current proposal under GST exhibits a sharp spike in tax rates for the Services sector. But the government cannot allow a high level of taxation on such an important sector and is likely to look for ways to ease it out while finalizing the rate structure.
5. There is a strong plea to bring CGST and IGST bills as finance bills, but the government is reluctant to make a promise.
6. At the current stage, it is not entirely clear how will cross empowerment of the two parties work. There are talks to impose a threshold limit of Rs 25 crore and do away with dual control. Only in due course of time, we will know if the states are willing to accept such a proposal.
7. In future, we may also see the rationalization of various tax departments. The Central Board of Excise and Customs (CBEC) looks after custom, excise and service tax department. Thus, the CBEC will need to be revamped once the GST is legislated.
8. Compensation aspect of GST is what thawed the earlier bottleneck. The States had rejected the Standing Committee recommendation of a staggered payout plan for five years and won the argument for full compensation.
9. The model GST law also fueled speculations among brokers, mutual funds and retail investors that transactions in the capital market may invite levy of additional tax. The way it is worded, securities do appear to fall under the ambit of model law.

Conclusion

Since the passing of the Bill in Rajya Sabha, there has been an endless debate regarding the implementation of the GST. Here, it is important to note that many states offer tax benefits to bring in manufacturing units. It is not yet clear as to what will happen to such incentives in the GST era. Similarly, one is not sure if special economic zone will continue to be relevant once GST is implemented.