GST : One Country One Tax

Introduction

"Goods and Services Tax" would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the Central and State governments. Goods and services tax would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. This method allows GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity. Taxable goods and services are not distinguished from one another and are taxed at a single rate in a supply chain till the goods or services reach the consumer.

Salient features of GST bill

• The GST shall have two components: one levied by the Centre (CGST) and the other levied by the States (SGST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). 
• The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.
• The CGST and SGST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to CGST or SGST. 
• Since the CGST and SGST are to be treated separately, taxes paid against the CGST shall be allowed to be taken as input tax credit for the CGST and could be utilized only against the payment of CGST. 
• Cross utilization of input tax credit between the CGST and the SGST would not be allowed except in the case of inter-State supply of goods and services. 
• The problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc. In this case refund should be completed in a time bound manner. 
• Uniform procedure for collection of both CGST and SGST would be prescribed in the respective legislation for CGST and SGST. 
• The administration of the CGST to the Centre and for SGST to the States would be given. This would imply that the Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers. 
• The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform SGST threshold across States is desirable and that is why it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for CGST for goods may be kept at Rs.1.5 crore. 
• The taxpayer would need to submit periodical returns, in common format as far as possible, to both the CGST authority and to the concerned SGST authorities. 
• Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax, facilitating data exchange and taxpayer compliance.

Things which are not covered under the GST purview

• Petroleum products 
• Tax on alcohol
• Entertainment tax levied by districts or Panchayats
• Stamp duty and custom duty
• Tax on consumption and sale of electricity

Expected impact on inflation

• Under the proposed GST, effective tax rate on goods (comprising around 70-75 per cent of the CPI basket) will decline.
• A significant proportion of goods (majorly agriculture products) are not subject to tax and we expect a status quo in future.
• At present, services-oriented components constitute around 25%-30% of the CPI basket with a major share belonging to housing, transport and communication sector.
• A standard goods and services tax (GST) rate of 18-20% will not lead to significant inflation but a higher rate can fuel inflationary pressure.

Impact on different Sectors:

1. Automobiles: The effective tax rate in the sector currently ranges between 30%-47%.

• On implementation of GST the tax rate is expected to oscillate between 20-22 per cent.
• It is expected to drive overall demand and reduce cost for the end user by about 10 per cent.
• The transportation time and the overall cost will be reduced as the goods will be transferred from one state to another by easily surpassing various Octroi and check points.
• In addition to this, the cost for the logistics and supply chain inventory will be curtailed by almost 30-40 per cent.

Impact: In a long run, GST is expected to remain positive for automobile sector.

Key Beneficiaries: Maruti Suzuki, Hero MotoCorp, Bajaj Auto, Eicher Motors, Ashok Leyland.

2. Consumer durables: The current tax rate for the sector ranges between 7%-30%.

• The implementation of GST will essentially benefit companies, which have not availed tax exemptions in the past.
• It will lead to the reduction of the price gap between the organised and unorganised sector.
• The warehouse/logistics costs across the operational and non-operational segments will be curtailed. This will improve the operational profitability by almost 300-400 bps.
• The 7th Pay Commission is also expected to boost demand and fund inflow in the consumer durables sector by the end of the year.

Impact: The impact may remain neutral or negative, specifically for companies which either enjoy tax exemptions or fall under the concessional tax bracket.

Key Beneficiaries: CGCE, Havells, Voltas, Blue Star, Bajaj Electricals, Symphony, Hitachi

3. Logistics

• The implementation of GST will lead to lower transit time and thereby generate higher truck utilisation.
• This will boost demand for high tonnage trucks and lead to overall reduction in transportation costs.
• It will facilitate seamless inter-state flow of goods, which is expected to directly accelerate demand for logistics services.

Impact: The logistics sector is largely fragmented and comprises many unorganized sector avoid tax which generates a cost gap between them and the organized players. With the GST coming into picture, we expect an overall positive impact, with a reduction in the cost competitiveness as all the players will be brought under a uniform tax base, thereby improving growth opportunities for the organized players.

Key Beneficiaries: VRL Logistics, GATI, Blue Dart, Transport Corporation of India, Snowman Logistics

4. Cement: Currently, the tax on cement ranges between 27%-32%.

• The tax rate for the cement sector is expected to decline to 18-20 per cent under the GST regime.
• This is expected to lead to savings in the transportation cost, which currently comprises up to 20-25 per cent of total revenue.
• Thereby, overall realisations of cement companies will substantially improve post GST rollout.

Impact: The impact of GST will be positive, as the companies will also be able to save on their logistic costs, due to rationalisation of warehouses and lower transportation costs (due to decline transit time).

Key Beneficiaries: ACC, Ultratech, JK Cement, Shree Cement.

5. IT and ITES: IT industry is subject to an effective tax rate of 14 per cent.

• The tax rate under GST is expected to increase to 18-20 per cent.
• The industry earns a large part of its revenue from exports, which will continue to be exempt under GST.
• Litigation around taxability of canned software will probably end under GST regime as there will be no distinction between goods and services.

Impact: It is expected to range from being neutral to slightly negative.

6. Telecom: Currently, telecommunication services are subject to service tax of 14%.

• The tax rate is expected to increase to 18 per cent under GST.
• It is expected that the telecom companies may pass the increased tax burden on post-paid subscribers.
• Availability of input tax credit will lower the sector's capex cost.

Impact: Increase in effective tax rate may be marginally negative for the sector. The telecommunication companies may not be able to pass on all the increase in taxes to all the end consumers, especially the ones in the lower segment.

7. Metal:

• Currently, the effective tax rate for base metal products is 19%-21%.
• VAT ranges from 4-5% depending on the state.
• Excise 12.5%, CST 2% and entry taxes in respective states.

Impact: Under GST, it is not known whether metal products will attract a special rate that is lower than the standard GST rate.

8. Banking and financial services:

• Currently the effective tax rate is 14%, which is levied only on fee component (and not interest) of the transaction.
• Under GST, effective tax rate on fee-based transactions is expected to increase to 18-20%.
• As the taxes on the input services will increase, operating expenses (comprising of rent, legal & professional fee, advertisement, insurance, telecommunication and other expenses) will also increase marginally.

Impact: With the implementation of GST a moderate increase in the cost of financial services such as loan processing fees, debit/credit card charges, insurance premiums, etc. is expected.

9. Pharmaceutical:

• Currently the effective tax rate is 12%.
• Domestic pharmaceutical industry expects to gain from operational efficiency as a result of GST regime, but the impact will be negative if the overall rate is around18%-20%.
• There is uncertainty whether the healthcare sector as well as life-saving drugs and medical devices will continue to be exempt from taxes and levies, once the GST is rolled out.
• Tax reform will result in supply chain savings and operational efficiency.

Impact: With the implementation of GST a moderate increase in the cost of medicines is expected.

References:

• GST Rate of 18-20% to cause mild inflation: Economists
• GST will change the way India does business: Who will win, who will lose
• GST Bill passed in Parliament: What happens next?

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About The Author 

This report has been prepared and drafted by Siddharth Doshi and published by Aakash Raval who are pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, Gujarat , India. 

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