GST Bill All We Need to Know

Industry By Rohit Chaturvedi

“While the foundation of India-Ethiopia relations in education can’t be static and new forms, like tele-education, have emerged, India’s involvement in Ethiopia’s education system improvement is still one of the brightest and honourable examples of Indian participation in the development of Africa.”

The passage of the Constitutional Amendment Bill) has been approved by the Rajya Sabha and the President of India. The bill once ratified by the states, will pave the path for framing laws to implement the laws related to Goods & Services (GST). Also, it is high time to analyse the impact of the proposed regime on the economy. The effect of GST is not expected to be all positive and there are likely to be a few negatives in the short run as the uneven imprint GST will be leaving on various parts of the economy. Although, overall repercussions are likely to be beneficial owing to the salubrious impact on the fiscal front, there are pockets, which will feel the pinch. This article is a quick coverage of the emerging contours of the proposed GST in India and what the possible fallouts on some major segments of the economy could be.

Before I write about the outlook of these segments post-GST, it is worth remembering that a change in business processes and strategies will be required for even those industries which are likely to benefit.

GST, as most of us know, is a comprehensive indirect tax regime covering sale, manufacture and consumption of almost all (with few exceptions in India) goods and services. The broader aim for implementing GST is to make the entire country a unified market to enable seamless movement and delivery of goods and services.

GST is a value-added tax, which means that taxes are levied only for the value added at each stage. The mechanism involves two steps. First, the taxes at each stage will be paid by the entity purchasing the goods/services at a cumulative price. In the second step, credits for all the taxes on the purchases of inputs may be claimed. The net effect is that at each stage the taxes are paid only for the value addition at that stage. It might be noted there is no input credit available for the final consumer as there is not value addition at the final stage.

Benefits due to the implementation of GST comprise uniformity of taxes, less onerous compliance for businesses, easier administration by the government, no double-taxation or tax on tax, etc.

The implementation of the GST regime in India is envisaged to take place from April 1st, 2017, provided 15 out of 29 states ratify the legislation and the President gives his consent. In order to meet the deadline, the states must ratify before the Parliament’s winter session in November.

The consensus band for a revenue neutral rate of GST hovers around 18-20 percent. The revenue neutral rate is a rate which will leave the Centre and states’ (mainly) revenues unaffected.

The aforementioned revenue neutral rate is likely to affect different segments of the economy differently. On an overall basis, since services comprise around three-fifth of the GDP in India, the prices may go up in a short run. The reason being an increase in overall tax rate from the current 15 percent to 18-20 percent. However, this should be seen in combination with the other gains which might be accrued to the services industry due to the positive externalities.

The overall impact on the manufacturing sector, which contributes to less than a fifth of GDP, is likely to be beneficial. The current effective tax rates on manufacturing are upwards by 22 percent.

The impact on households is also going to be uneven. Households with more discretionary income tend to spend more on services as compared to those with lesser income. Households with lower income levels spend more on basic goods such as food items. Therefore, the poorer households are likely to benefit from the GST regime with their bills witnessing decline.

Households may also see higher EMI payouts on account of higher service taxes. On a more segmented basis, logistics services industry is one of the major industries with positive impact despite higher tax rates. The efficiencies gain due to subsuming of state taxes such as state tolls will reduce the waiting times at toll booths (Nakas). The resulting impact will see faster turnaround time for the vehicles and thus higher utilisation of vehicles. In addition, the benefits of economies of scale will become realisable after the unification of the market. The combined effect will be lower tariffs for end consumers and industries with high components of logistics services requirement such as automotive and retail industry.

As mentioned in the preceding paragraph, automotive and consumer goods industries are two of the major industries with a positive fallout from the GST regime.

In addition to reduced logistics costs, the industry might benefit from the lower effective tax rates in comparison to the present applicable rates. The effect is likely to be uniform on the passenger car segment. However, commercial vehicle segments may see benefits tilted towards larger vehicles.

The retail industry may also see benefits due to removal of cascading taxes. Hitherto, the industry does not avail itself of input credits for the services utilised. In addition to the availability of input credits on services, the retail industry might benefit from lower logistics costs. The reduction in logistics may be realised due to consolidation of supply chains and lower transportation costs. On the flip side, the industry might need higher working capital as taxes are now paid when the goods leave the factory. At present, the taxes are paid when the goods are sold to clearing and forwarding agents.

On the other hand, the oil and gas industry may have to grapple with dual tax regime and thus likely to be negatively impacted.

The article gives an overview of GST and a basis that how GST may impact each industry. The impact on each industry may be evaluated from the standpoint of a few common elements. The principal elements include effect on cost structure due to increase/decrease in tax incidence, effect on the compliance process, impact on business model, bearing on financial and operation strategy, among others.

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