Transparency to tax burden: 10 ways in which GST will impact people, businesses
Parliament held a special midnight session to introduce Goods and Services Tax (GST), replacing a complicated mix of state and federal taxes that will change the cost of nearly everything people buy.india Updated: Jul 06, 2017 09:57 IST
Collapsing 17 federal and state indirect taxes into a single goods and services tax (GST) across the country from midnight of June 30 is set to change the lives of individuals and businesses in many ways, some of them in a disruptive way.
For the first time, consumers will get to know the actual amount of taxes they are paying for goods and services in the form of a single GST rate that will be split between central and state governments. At present, what is shown in an invoice is the state-level value added tax (VAT) and in certain cases, the service tax levied by the central government. This does not cover parts of taxes borne by raw materials and services used by various intermediaries which get added to the final price of the item purchased but are not visible in the invoice. The efficiency of GST is expected to bring down the tax burden and improve transparency.
2) Shift in tax burden
While the effort has been to keep GST rates as close as possible to the current tax burden on goods and services and make the transition revenue neutral, the effective tax on individual items is likely to move up or down. Tax on services like telecom is likely to go up. Actual changes will depend on the pricing strategies businesses adopt.
3) Turning point for unorganized sector
Businesses with annual sales less than Rs 20 lakh are exempt from the rigours of registering for GST and filing returns. But this exemption poses a real and immediate risk of bigger businesses turning away from the unorganized sector for sourcing materials and services to larger suppliers that are within the GST system so that taxes paid by their suppliers are available as credit. Small businesses have to voluntarily sign up for GST to not lose their customers. Big procurers wanting to keep ties with the unorganized sector, however, have the option of paying taxes on their behalf under a system called “reverse charge”. Small players becoming a part of the GST system could improve tax compliance not only of indirect taxes, but also of income tax.
4) Small and medium enterprises (SMEs) take a hit
The tax burden for SMEs is set to go up. So far, this segment of the economy with annual sales up to Rs1.5 crore enjoyed exemption from central excise duty and were paying only state-level taxes such as VAT. With the threshold for GST registration for businesses being much lower at Rs20 lakh annual sales, SMEs will come under GST and have to pay taxes at the federal level too—the central GST. This could mean a doubling of the tax rate for them, although the actual increase in tax burden may not be equally high because of the tax credits passed on to them from their material and service suppliers. GST is designed to have a larger taxpayer base with the idea of lowering the overall tax rate.
5) Vanishing tax breaks
There is no more excise duty exemption for setting up production units in the north east or hill states. Businesses will have to make investment decisions based on sound economics rather than tax arbitrage. “This gives a reason for businesses to set up new production units closer to their market or closer to ports rather than expanding existing facilities in places that enjoy area based exemption,” explained R. Muralidharan, senior director, Deloitte in India. Units that have already come up on the promise of excise exemption for a specified period will have to pay tax first and claim refunds in the remaining period. Drug makers, cement companies and automobile producers have units in hill states.
6) Revamping supply chain
GST will make businesses take another look at the location of their warehouses and movement of goods from state to state till the final consumer. Since GST is applicable on transfer of stock within a group company’s warehouses in different states, businesses may try to optimize their supply chain, said Bipin Sapra, partner, EY.
7) Keeping on the right side of law
Companies and traders have to think hard on their pricing strategy during the transition period to avoid getting caught for not passing on any reduction in effective tax burden to the consumer. An anti-profiteering body being set up will keep a watch on how businesses recalibrate the tax inclusive price charged from consumers.
8) Training vendors, workforce
Businesses have to not only update their business, accounting and tax payment software, but also train their workforce. Training vendors and business partners is also important as the invoices they file are relevant for the taxes to be paid by a business. “People in the entire business ecosystem of a company needs to be trained,” said Prashant Deshpande, partner at Deloitte Haskins & Sells Llp.
9) Return filing
While suppliers have to upload details of transactions and invoices, the tax return of buyers of goods and services will be auto-generated based on suppliers’ data, minimizing human discretion. Buyers can either accept auto-generated return or modify it.
10) Liquor and fuel
Liquor and five hydrocarbons — crude oil, petrol, diesel, jet fuel and natural gas — may see some increase in tax burden as they continue to remain in the existing tax system, while the GST paid on all equipment and services used in their production become an added cost.
(Published in arrangement with Livemint)