Will GST untangle India’s tax regime? How the new system might impact consumers and businesses
As the country awaits the roll out of a new tax system, the Goods and Services Tax, we look at how it might impact consumers and businessesbusiness Updated: Jul 08, 2017 18:46 IST
In a week’s time, the country will embrace a new indirect tax system, the Goods and Services Tax (GST), which will dismantle state barriers to create a single national market, giving a boost to a host of economic and development goals. Lofty goals apart, the switch to a single tax from 1 July is set to throw up some surprises for consumers and businesses.
Consumers will for the first time get a measure of the total central and state taxes levied on a product, ending a host of hidden and embedded taxes they paid so far.
Businesses will get to know if the increase in the headline tax rate on many items will actually be offset by the extra tax credits on raw materials and services, as claimed by the government.
Headline GST on telecom services, for instance, has gone up to 18% from the 15% service tax rate at present. This has led to concerns about a possible increase in telephone bills, although the government has stressed that tax credits available from the service tax paid earlier on spectrum payments will more than offset the rate hike.
“The jury is still out on the impact of GST on cost of telecom services as there is a lot of fine print. Once the new regime kicks in, we will get clarity based on the billing,” an executive with a telcom service provider said on condition of anonymity.
The new indirect tax system is also set to test how digital savvy small traders are when it comes to filing tax returns.
The government, keen to ensure that GST is not inflationary, is in the process of setting up an anti-profiteering authority to prevent firms from passing on any reduction in tax burden to consumers.
Discounts & concerns
On their part, producers of items such as apparel and shoes, which have a seasonal market, are offloading their entire summer stock with discounts before July 1.
Harkirat Singh, managing director, Woodland Worldwide, said his company has kicked off its end of season sale ahead of GST’s introduction. “We are trying to liquidate our summer merchandise which we do not want to carry forward to coming months,” he said, adding that most of Woodland’s footwear falls in the 18% slab, which may translate into a marginal increase in cost. “However, we have decided to absorb this cost and not to pass it on to consumers,” Singh said.
While most tax experts ruled out the possibility of supply disruptions, an industry executive, who spoke on condition of anonymity, said that some firms may optimize their stocks in the run-up to 1 July.
The government has already clarified that if businesses and traders produce documents for the taxes paid under the current system, full credit for such payments will be available under GST. Where documents for excise or value added tax payments on raw material are not available from a supplier, businesses and traders will get 60% credit for the taxes paid on raw materials. This, the authorities believe, will prevent firms from reducing supplies in the weeks before the roll out.
“Businesses are not changing their inventory and supply patterns but at the retail level, traders may be destocking in the run-up to GST and restocking in the months immediately after the transition,” said Anil Rai Gupta, chairman and managing director at lighting and electrical appliances company Havells India Ltd.
Praveen Khandelwal, national secretary general of Confederation of All India Traders, a trade body, said it is business as usual for traders ahead of GST, and added that consumers need not worry about any supply disruptions.
A tale of compromise
Rolling out GST on 1 July is the result of more than a decade of discussions, tussles among states, and between states and the Union government, instances of give and take, lobbying and compromise. The highlight of the reform is the creation of a federal tax institution, the GST Council, which has state ministers as members and the Union finance minister as chairman and gives every state a say in the country’s indirect tax policy.
A seamless market of over a billion people and eight million registered indirect tax assessees paying a single tax for goods and services is likely to go a long way in achieving what the government has been trying to do through various measures—promoting the manufacturing sector, boosting exports, creating more jobs, improving the investment climate, cutting down tax evasion and lowering the compliance cost to businesses.
According to Ansh Bhargava, a senior consultant at Taxmann.com, a company that assists taxpayers, the single market concept is akin to signing a free trade agreement between different states of India. “The GST regime seeks to break the barriers that currently exist between states and make movement of goods between different states easier,” said Bhargava. Elimination of the tax-on-tax effect by providing input tax credit will lead to lower costs and make Indian products competitive in the global market, he said.
Besides transparency, consumers are likely to benefit from lower tax burden on some products and services. Lower indirect taxes will also address the regressive nature of this levy which affects the rich and the poor alike, unlike taxes on income which is based on an assessee’s ability to pay.
For businesses, elimination of multiple levies and creation of a single market with fewer tax rates and fewer tax exemptions will improve the ease of doing business and reduce avoidable litigation. A large part of the tax litigation in India is around tax exemptions.
1. What is GST?
GST is a value-added tax at each stage of the supply of goods and services precisely on the amount of value addition achieved. It seeks to eliminate inefficiencies in the tax system that results in ‘tax on tax’ known as cascading of taxes. GST is a destination-based tax on consumption, as per which the state’s share of taxes on inter-state commerce goes to the one that is home to the final consumer, rather than to the exporting state. GST has two equal components of central and state GST.
2. What is input tax credit?
To make sure that tax is levied only on the amount of value addition at each stage of the supply chain, credit for the taxes paid at the previous stage is granted. For example, a garment manufacturer gets credit for the taxes paid on the materials purchased while computing the final indirect tax liability on his product that is collected from the consumer. Similarly, a service provider, say a telecom company, gets credits for the taxes paid on the goods and services used in his business.
3.Who is liable to pay GST?
Businesses and traders with annual sales above Rs 20 lakh are liable to pay GST. The threshold for paying GST is Rs 10 lakh in the case of north eastern and special category states. GST is applicable on inter-state trade irrespective of this threshold.
4.What are the existing taxes that are subsumed into GST?
Taxes on production such as central excise duty and additional excise duty, import duties such as additional customs duty known as countervailing duty and special additional customs duty, service tax, central cesses and surcharges, state taxes like value added tax (VAT), central sales tax on inter-state trade of goods, luxury tax, entertainment tax except those levied by local bodies, taxes on advertisements, taxes on betting and gambling and state cesses and surcharges on supply of goods and services are subsumed into GST. Basic customs duty, which the tariff barrier on imports, is not part of GST.
5. What are the benefits of GST?
GST brings transparency on the taxes levied on the supply of goods and services. At present, when an item is purchased, the common man sees only the state taxes on the product label, not the various embedded tax components. GST will improve the ease of doing business as entry barriers along state borders will be dismantled. The new indirect tax system is expected to improve tax compliance, boost revenue receipts of central and state governments and accelerate GDP growth rate by an estimated 1.5-2 percentage points. Elimination of cascading of taxes will result in reduced tax burden on many items.
6. What are the products not part of GST?
Crude oil, diesel, petrol, natural gas and jet fuel are temporarily kept out of GST. The GST Council, the federal indirect tax body of state finance ministers chaired by union finance minister, will decide when to bring these items into GST. Liquor is kept out of GST as a constitutional provision and hence it would require an amendment to Constitution if it is to be brought into GST net.
7. What is integrated GST or IGST?
IGST is the tax on inter-state supply of goods and services with central and state GST components.
8. How are imports treated?
Imports are treated as interstate supplies and will attract IGST. Exports do not attract any tax. Taxes paid on the raw materials and services used in export of goods and services are refunded to the business.
9. What is the anti-profiteering mechanism?
To prevent the possibility of prices going up and to make sure that the reduced tax burden on products and services are passed on to consumers, the government introduced an anti-profiteering clause in GST law. The anti-profiteering authority to be set up will act on complaints of profiteering and direct a profiteering supplier to cut price, return the benefit of reduced tax burden to the buyer with 18% interest or recover such amount if the buyer cannot be identified or doesn’t make a claim. A profiteering business could lose its GST registration too.
10. How are decisions taken at the GST Council?
No decision can be taken in the Council without the concurrence of both the union or the state governments. Decisions will be taken by a 75% majority of the weighted votes of members present and voting. Union government’s vote has a weightage of one third of the votes cast, while all states together will have a weightage of two third of the votes cast.
Good, but not the best
However, the GST that is ready for implementation is far from ideal. The guiding principle for the government while trying to secure consensus amid competing interests of various stakeholders was that it is better to have a good GST instead of waiting endlessly for the best one. From the concept of an ideal GST of low tax rate with few exemptions initially considered, the final form has four rates—5%, 12%, 18% and 28% for goods and services—with some items in the highest slab attracting an additional cess. Most of the items fall in the 12% and 18% slabs depending on the current tax burden on them.
Five hydrocarbons—crude oil, petrol, diesel, natural gas and jet fuel—are temporarily kept out of GST, while liquor has been constitutionally kept out of the new tax regime. That was a compromise the Union government had to accept as states wanted the items on which tax collection is the easiest to be out of the new tax regime which gives little liberty to individual states to revise rates on their own.
The GST Council, chaired by Union finance minister Arun Jaitley, will consider inclusion of hydrocarbons in the new tax regime once state revenues stabilize after GST implementation. Nearly 40% of state revenues are estimated to be from petroleum products.
As of now, the Centre taxes production of goods and supply of services, while states get to tax sale of goods but not supply of services. In GST, this barrier is removed and both the Union and state governments get to tax the entire value chain of goods and services, increasing compliance, explained V.S. Krishnan, adviser (tax policy group) at EY India and a former member of Central Board of Excise and Customs.
There is still some work to be completed. One among them is to clear rules regarding e-way bills, an electronic permit for movement of goods. According to Prashant Deshpande, partner at Deloitte Haskins & Sells Llp, the e-way bill rules need to be very practical and minimize compliance burden. Also, states need to ensure that border check posts are eliminated.
GST in the current form is a diluted one in comparison to the original concept, but experts welcome its roll out. “Introduction of GST is a very good start. Reforms, however, do not end here. Certain features can be further streamlined,” said Deshpande