Mr. Govind Goyal from the chartered accountancy firm, Govind Goyal & Co., says that GST will bring in significant benefits for the country, businesses, as well as consumers. If the constitutional amendment and white paper are cleared by April 2015, GST implementation is likely by March 2016. Even when GST comes in, a few differential tax rates are expected to exist (in line with the current exemption and necessary commodity list). He believes that SGST and CGST should not be higher than 15%.
Positives:
• States offering large base of services will benefit hugely.
• Consumer – benefits from transparency in tax payment — will be able to choose amongst the goods where tax levy is lower.
• Industry – GST will be the only one tax to comply with; this will simplify tax payment and administration for companies.
• Government – revenues will rise as tax base will widen and leakage on taxation will reduce substantially. Black economy will translate to white economy.
• Cost efficiency will make Indian exports more competitive.
Concerns:
• Government has not analysed the impact of GST on trade and industry — their perspective needs to be understood before implementation.
• Dual structure is a problem as CGST credit may not be set-off against transaction all over India while SGST credit can be utilised all over India. • Single-rate GST would have been the preferable choice — revenues could be shared between centre and states. States do not want to let go off taxation powers.
• No significant study has been done on the appropriate GST rate for India.
• Administration of GST at state and centre level will be tedious for the taxpayer (for example, same invoice will have to be shown to state and centre authorities for credit purpose).
Clarity needed:
• Treatment of sectors and threshold exempted currently
• Treatment of the Special Economic Zones
• Availability of CGST credit on purchase of goods inter-state
• Manner in which IGST credit will be made available to the taxpayer
• Place of supply rule should be clearly defined – there is no clarity on the treatment of movement of services and its credit benefit across states
Advice to the government:
• Threshold limit of Rs 1mn will bring in smaller businesses under the tax ambit. Considering higher inflation and income levels at the current juncture, many uneducated and uninformed businessmen will fall in this category. Government will have to provide education and extremely simplistic IT infrastructure for the understanding of this category. Higher threshold in the beginning could be considered and lower threshold should be brought under tax net, but not included under GST. This will give smaller businesses time to prepare.
• One law should be made for GST within which different taxation rates for CGST, SGST, and IGST can exist. In line with CST, GST can be collected by the centre and distributed to states.
• No additional compensation should be given to the states as GST will bring in sufficient gains for the states.
• Administration of CGST and SGST should be done at one place/office.
• Government should ensure that a purchaser is able to get credit on the credit issued by the supplier, irrespective of issues with the supplier in other taxation contexts.
• Certain services come along with goods; these should be merged as one.
• At the initial stage of implementation, government should administer the inflation burden on the consumer, as businesses may enjoy much higher margins and profitability and the entire burden may be passed on to the consumer. With time, market forces and competition will find equilibrium and prices will decline.
Mr. Lakshmikumaran, founder of Lakshmikumaran & Sridharan (L&S), an Indian law firm specialising in the areas of international trade, taxation, intellectual property and corporate laws, believes that industry should be given sufficient time to structure their systems and accounts for GST — 6-9 months of preparation time should be given to corporate. As of now, very little information is available with the industry participants about GST tax rate, filing procedures, etc. GST benefits will be compromised if petrol, alcohol, tobacco, and real estate are kept outside its purview. Past experience with VAT introduction and implementation has been sour. Internationally,countries have given two years of time for implementation.
However, GST should be introduced in any form as it brings a host of other advantages for the industries.It can be enhanced with time and experience. Government’s intention is to introduce it by April 2015. If implemented as intended, states may give a few months’ temporary exemption to industries from complying, to ensure adequate preparation.
GST should be introduced faster; DTC can still wait. GST is the best nutrition for the economy, he feels. It will be a step away from the existing archaic laws, will reduce incidence of tax evasion, and tax litigations will drop. The most important benefit for industries is from tax set-off along the entire supply chain.
Consumer will be impacted in the short-term, while government revenues should remain neutral to higher. It is advised that the draft legislation should be put in the public domain for their comments and at least 6 months should be given for preparation. Goods and services should be charged at the same rate. Variation between the CGST and SGST will not impact the end-consumer.
Pratik Jain, tax partner, KPMG India, expects GST to be implemented by April 2016. He says GST will address wide-ranging issues with the current indirect tax structure. Currently, the tax system drives the business in many ways and not economic efficiency. Cascading impact and no credit setting off between centre and states adds to the cost and inflates prices.Every state has a different law, filing procedures, and tax rates and incentives, influencing businesses. This results in multiple touch points with authorities,cumbersome compliances, and state-specific arbitrage.
GST is internationally recognised in most developed countries with the only exception of United States. As per our constitution, dual structure is feasible and suitable. SGST is designed to go to the consumption state – this resolves the problem of inter-state restrictions being faced in the current structure.
States are worried about losing fiscal autonomy (as GST council will decide the tax rate, products, etc.) and insufficient compensation (producing states will suffer more). More traders will fall under GST. Mr. Jain believes that the central government may agree to states’ demand for petroleum and alcohol exclusion from GST (out of demands to exclude petroleum
goods, alcohol and entry tax).
GST will be a significant reform, but may not be a perfect one. Exclusion of petroleum goods will mean that approximately one-third of the economy will be out of GST. There is no clarity on tax rate yet; however,expected GST rate is likely to be revenue neutral, considering the benefit of credit offset and services under GST.
In the short-term, GST may be inflationary — gain from offsets on input for the manufacturer is likely to be passed on to consumers when more clarity emerges. If it is not implemented in the next 1-2 years, then GST may be delayed, as the government may not be comfortable introducing GST towards the end of its regime — history has shown that governments that have introduced GST have not returned to power.
A tax expert with a renowned FMCG company says that GST will streamline the current tax structure.Impact on the FMCG industry will depend on the tax rate. As of now, it is believed that GST could be introduced at a rate of 16-18%. At 18%, there is no benefit or loss for the company. However, currently,packaged food is taxed at a lower rate of sub-5% — under GST this rate will be revised upward to the introduced GST band (16-18%), which is a big concern for the industry. This will have an inflationary impact. Personal care goods could benefit at 16% GST; at 18% it will breakeven. Distribution and compliance will streamline.
Mr. MS Vasan, a senior tax professional says GST is still at a nascent stage. With 29 states, 2 union territories, plus centre — 32 independent countries within one unified country (in his opinion) to share VAT revenues — is an uphill task.
• GST will bring tax rate rationalisation for all goods and services, he feels
• Compensation should be provided for lesser revenue-earning states, as consumption states will earn higher revenue — e.g., manufacture in Gujarat but consumed in Delhi (cars)
• An equilibrium should be created among state taxes, share of taxes, and compensation for shortfall
Central GST, state GST and inter-state transfers will have to be tracked, recorded, and assessed. GST should be implemented flawlessly without any baggage of VAT shortfalls and imbalances. Tax reforms, IT infrastructure and simplified procedure should go hand in hand for the success of GST. The government will probably be equipped to handle this upgraded version of tax reform by 2016.
The expected rate of 16-20% will be better for the automobile industry vs. the current rate of 24-28%. Also, currently, there is no input tax credit set-off benefit for the industry across the supply chain. GST tax rate is not an issue as long as it remains vatable. The entire chain of distribution will become more transparent. VAT suffered with implementation varying from the white paper recommendations causing confusion for the taxpayers, thus care should be taken to ensure that GST implementation is in line with the recommendations, ensuring transparency. Consistency and transparency is the key for GST reform. GST should be levied across the value chain and there should be minimum exemptions. End consumer will be burdened if the product is in the monopolistic segment. If the segment is regulated in terms of price, customer will not be impacted. Companies will benefit as credit set-off across the chain will add to margins. GST imposition will cut down the freebies that are being given (on cars) currently.
A large Maruti dealer says that GST implementation will be a huge positive for the sector. Currently, the tax system is fraught with inter-state complications in taxation methods even if the VAT rate is the same. The stock distribution of cars is an expensive affair as warehouses are set on the basis of tax benefit rather than economic gains. It takes about 6-7-days for a car delivery from Maruti’s Gurgaon warehouse to Mumbai (in Maharashtra). With the advent of GST, the number of days can reduce to a single day as stockyard/stocks will be located at a few centralised places. Maruti already has a few regional stockyards and regional parts distributions centres but would be able to dramatically increase the number if GST is implemented. Currently, Maruti’s regional parts distribution centres can stock up to 30% of the range of spare parts due to taxation norms. With GST implementation, it will rise to 80% of the range of spare parts, thus hastening the supply of spare parts. As of now, there is no clarity on octroi and LBT — these two set of taxes add significantly to the administrative complexities.
Tax rate of GST will not be a concern for the sector as set-off benefits will be provided for the manufacturer and service provider. However, the customer may be burdened if it is steep. A rise of 1-2% or slightly more along with the abolition of octroi and LBT should be acceptable to the consumer. A higher rate will adversely impact demand, as the burden of higher tax rate will have to be borne by the consumer
Mr. Dinesh Maheshwari, tax expert at Future Group, is gung-ho about GST. Currently, the company has warehouses spread across the country in order to avoid inter-state transfer taxes. If all the taxes (like octroi, entry tax, CST) are subsumed in GST, the company will focus on consolidating warehouses, which will add to cost efficiency (3-4% cost reduction expected on this front). Input tax credit will be available on capex under GST — this will add to savings of 20% of the capex amount. Service tax credit will also be available under GST, adding 7-8% to cost savings. Services form a big portion of expense for the retail sector in the form of rent,housekeeping, legal and professional services, etc. He does not expect credit benefit to come from electricity and petroleum products as these are likely to remain out of GST ambit. Simplistic structure and lesser warehouses will add to savings.
Consumer will be burdened somewhat as prices of some of the commodities will rise in the range of 5-10% (90% of the segments will not record any price rise), he believes. GST tax rate expectation is at 17-20%. Corporate and business consumers will shift to organised sector as credit can be claimed against the expenses.
1) Your views on the currently advised GST structure?
GST, which is intended to totally revamp the manner of indirect taxation, is definitely the most awaited reform. Though GST is a welcome step (all taxes will become a pass through), the success of GST lies in its smooth implementation.
GST proposes to replace all indirect taxes being levied on goods and services by the Indian central and state governments in the form of Central GST and State GST, respectively. The proposed GST will be a further improvement over VAT, hence a study of the manner and shortcomings faced while implementing VAT can be useful.
Considering India’s federal polity, implementation of dual GST structure is an apt tax reform, which safeguards states’ as well as centre’s revenue (albeit with a temporary loss to the state exchequers). From a manufacturer’s standpoint, this will definitely help reduce the cascading effect of various taxes that are levied throughout the manufacturing process.
Consensus among stakeholders is the key to implementing GST. However, the government should ensure that there are not too many exceptions from the GST framework.
2) We understand that the government is in favour of introducing dual GST? Its benefits and negatives?
Benefits of GST:
Negatives:
3) What is the GST rate that government may introduce for state GST and centre GST? What could the cumulative GST rate be? How will these rates compare with the existing VAT and centre tax structure.
Presently, under the multiple indirect tax laws, excise ranges from 8.24% to 12.36%; service tax is 12.36%; VAT ranges anywhere between 4% to 20%; aggregate customs duty falls between 24% and 28%. These are broad rates and exact rates would depend upon product and other factors.
The combined GST rate is expected to be below 20%. The Empowered Committee has decided to adopt a two-rate structure – a lower rate for necessary items and items of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.
4) What will be the impact on tax collections for the centre and states?
Increase in tax base will definitely see a rise in revenue collection for the centre. For states, there could be a short-term revenue loss, but over time, the revenue productivity should increase due to better tax compliance and increased productivity of the economy.
5) What are the issues that states have due to which they are wary of introducing GST? Do you concur with their concerns?
Some states are apprehensive about surrendering their taxation jurisdiction, while some want to be adequately compensated. To an extent, this seems justified since the states have not been entirely compensated for revenue loss arising from reduction in Central Sales Tax since 2010.
At present, states derive about 35-40% of their sales tax collections from petroleum products and alcohol. Haryana gets Rs 40-50bn from purchase tax on food grains. They are likely to lose a major chunk of the revenue if these products are brought within the scope of GST.
Some Union government officials have insisted on giving only administrative control to states, whereas states have unanimously recommended grant of legal powers. This may create a significant eco-political inter-dependency.
6) What will be the impact on business and sectors?
The current indirect taxation regime does not fully address the issue of cascading effect of taxes already paid at earlier stages as there are several other taxes, which both the central government and the state government levy on production, manufacturing, and distribution, where no set-off is available in the form of input tax credit. These taxes add to the cost of goods and services through “tax on tax”, which the final consumer has to bear. Such cascading effect of taxes will get removed with the introduction of GST with a continuous chain of set-off from the stage of manufacturing to the retailer’s stage. Thus, the overall cost of goods is likely to come down under the GST regime. Lower prices will lead to more consumption, which will have a positive impact on businesses. Also, the overall compliance cost for an entity will reduce in GST, which will increase the bottomline.
7) Which sectors will be positively influenced and which will have negative impact?
Currently, almost every sector is marred by multiplicity of taxes and the cascading effect across the chain. A simplified tax regime through GST will certainly have a positive impact on sectors like pharma, auto, logistics, retail and FMCG. However, liquor and petroleum industries may not benefit in light of their likely exclusion.
8) Impact on the end-consumer? What will be the impact on end-prices? Will the burden largely fall on the end-consumer? Which commodities can see higher prices?
In the GST system, both central and state taxes will be collected at the point of sale. This will benefit individuals as end prices could come down. Lower prices will lead to more consumption, thereby helping companies.
9) When is the GST likely to be introduced? Howwell prepared is the corporate sector for it?
The new government’s election agenda as well as its first budget speech emphasized GST. However, considering that substantial work is still left to be completed, it does not seem feasible to implement GST from April 2015.
While the corporate sector would be eagerly awaiting/seeking speedy implementation of GST, it is necessary that GST law and rules first need to be released by the government.
Thereafter, the government as well as businesses will require reasonable time to implement GST. It will require significant support from a good information technology platform.
10) Which taxes (state or local bodies) will be left outside the purview of GST?
Basic customs duty and cess thereon, LBT, octroi, entry tax in lieu of octroi, stamp duty, VAT on alcoholic beverages (subject to state discussion) and excise duty on tobacco could be left outside the purview of GST.
11) Which commodities and services are expected in the exclusion list
Alcoholic beverages, petroleum products, and tobacco are expected to be out of the GST net. If this happens, it may not be an ideal GST and hence the government should strive to bring more products into the GST framework.
12) Any thoughts on the treatment of petroleum products, tobacco products, and alcohol? If included, how will the retail prices be impacted? Or will the larger impact be felt on state revenue loss?
These products could be brought under the GST tax net, with power given to states to charge additional excise duties over and above the standard SGST.
Deloitte Survey – survey done across industries and cities
•70% of the respondent positive about GST, 28% unsure (possibly due to poor awareness)
•Suitability of dual GST in India – 60% of the respondents feel dual GST system is suitable, 23% disagree and 17% are unsure.
•Tax rate – 12% rate seems to be most appropriate for the respondents
•GST on petroleum goods – 75% agree, 25% disagree
•Most of the respondents agree that GST will eliminate the cascading effect of taxes
•75% of the respondents agree that tax credit will be simpler in the GST regime
•Over 60% of the respondents across sectors feel that business model change will be necessary
•Transition from current tax structure to GST regime should be given around 9-12months
•Respondents from manufacturing and services are unsure about GST impact on cost and price of product. Trading sector participants believe that cost will fall.
•Training current staff and appointing professional advisors seems to be the approach
CII-KPMG Survey
•88% of the respondents prefer a single GST enactment (both for centre and states)
•77% of the respondent would prefer to have one single rate for CGST and SGST
•86% of the respondent would prefer to have a cumulative standard rate between 14-16%
•61% of the respondent prefer that exempted services be notified instead of taxable service like the norm internationally
•45% of the respondents believe that their business will be impacted due to taxation of stock transfers
•44% of the businesses may consider consolidating their business operations
•55% of the respondents have not analysed the price impact of GST on goods and services
•84% of the respondents feel that input tax credit benefit will have a positive impact on their profitability
•46% of the respondents feel that higher working capital will get blocked under GST (due to GST on import and stock transfers)
•95% of the respondents feel that mechanism to transfer credit from one state to another should be inbuilt in GST
•78% of the respondents feel that their business will be impacted due to rise in tax rate on services
•66% of the respondents feel that cash refund would be an adequate substitute for tax benefits
•40% of the respondents feel that IT/system changes will be a big challenge (it may take 4 months to reconfigure IT systems.
Subscribe to enjoy uninterrupted access
