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Impact of Goods & services Tax in India


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Briefly discusses the probable price impact in 30 selected sectors of India's economy of GST

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Impact of Goods & services Tax in India

  1. 1. KUNAL BASU 0 Impact of Goods & Services Tax In India
  2. 2. KUNAL BASU 1 Table of Contents Abstract..................................................................................... 3 What is GST? ............................................................................ 4 Pre-GST Indirect Taxation ......................................................... 5 Historical Background............................................................... 6 Levy of GST ............................................................................... 7 How GST Will Work ................................................................. 10 Some Salient Features of the GST Act ..................................... 12 Role of the GST Council .......................................................... 14 Plusses of GST ........................................................................ 15 Minuses of GST....................................................................... 16 Rates of GST............................................................................ 18 Cost Impact of GST on Some Sectors ...................................... 20 Information Technology........................................................ 20 Fast Moving Consumer Goods.............................................. 21 E-Commerce......................................................................... 21 Telecommunications............................................................. 22 Automotive ........................................................................... 23 Media ................................................................................... 26 Insurance ............................................................................. 26 Cement................................................................................. 27 Aviation ................................................................................ 27 Textiles................................................................................. 31 Pharmaceuticals................................................................... 33 Financial Services ................................................................ 35 Real Estate ........................................................................... 36 Travel, tourism and hospitality............................................. 38 Health Care .......................................................................... 38 Alcoholic beverages .............................................................. 39 Education............................................................................. 39 Renewable Energy ................................................................ 40 Non-Renewable Energy......................................................... 41
  3. 3. KUNAL BASU 2 Electrical & Electronic Equipment ....................................... 43 Oil & Gas.............................................................................. 43 Goods of Mass Consumption................................................ 44 Jewellery & Bullion .............................................................. 47 Exports................................................................................. 49 Manufacturing Industry....................................................... 51 Engineering, Capital Goods & Power Equipment.................. 54 Roads & Highways ............................................................... 55 Hospitality............................................................................ 56 Importing & Manufacturing by MNCs................................... 56 Infrastructure Projects ......................................................... 58 Conclusion .............................................................................. 60
  4. 4. KUNAL BASU 3 Abstract Although there is a vast volume of online information on the Internet on India’s forthcoming Goods & Services Tax (GST), there is no consolidated reckoner of how GST is expected to impact diverse sectors of the economy. The overriding and convergent concern of manufacturers, service providers and consumers is GST’s impact on costs. Since specific goods and services are yet to be allocated to the four approved GST rates, the Model GST Law and the 101st Constitution (Amendment) Act, 2016 have been variously interpreted by experts, leaving large room for debate and conjecture. However, there is unanimity in the merits of GST, tempered by initial inflationary concerns and relatively high costs of compliance. This paper therefore briefly attempts to outline the historical background of GST, its methods of calculation and likely impact on post-GST price levels in thirty different sectors of the economy. Owing to constraints of length, only few probable price impacts have been considered. The paper concludes that while GST is the biggest landmark fiscal reform in India after Independence (1947), its compliance-promoting revenue-neutral rates, implementation, exemptions and exclusions, in the backdrop of repeated political negotiations and resultant compromise would remain major impediments in its seamless establishment.
  5. 5. KUNAL BASU 4 What is GST? GST has excited substantial debate over the last over two decades. India’s Constitution divides taxation powers between Union and the states each of whom has some exclusive areas where they can levy tax. The 101st Constitution (Amendment) Act (2016) for Goods and Services Tax (GST) re-writes hitherto constitutional indirect taxation arrangements. It is a complex legislation that amends/adds existing/new provisions in Arts. 246A, 248, 249, 250, 268, 268A, 269A, 270, 271, 279A, 286, 366, 368 and the Seventh Schedule of India’s Constitution1. The Act defines GST as any tax on supply of goods and services other than on alcohol for human consumption. GST is a value added tax, levied at all points in the supply chain with credit allowed for any tax paid on inputs acquired for use in making the supply. Exemptions would be restricted to a minimum. GST is a value-added tax levied at all points in the supply chain with credit allowed for any tax paid on input acquired for use in making the supply. It would apply to both goods and services in a comprehensive manner, with exemptions restricted to a minimum. The GST structure would follow the destination principle. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-state transactions within India, State tax would apply in the state of destination as opposed to that of origin. GST is neutral to factors of production, business processes, business models, organizational structures and geographical locations. In keeping with the federal structure of India, it is proposed that GST will be levied concurrently by the Centre (CGST) and the 1 Ministry of Law & Justice (Legislative): THE CONSTITUTION (ONE HUNDRED AND FIRST AMENDMENT) ACT, 2016, extracted on Jan. 10, 2016 from ndment)%20Act,%202016.pdf
  6. 6. KUNAL BASU 5 states (SGST)2. It is expected that the base and other essential design features would be common between CGST and SGST across SGSTs for individual states. Both CGST and SGST would be levied on the basis of the destination principle. Thus, exports would be zero-rated, and imports would attract tax in the same manner as domestic goods and services. Inter-state supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the destined State). In addition to the IGST, in respect of supply of goods, an additional tax of up to 1% has been proposed to be levied by the Centre. Revenue from this tax is to be assigned to origin states. This tax is proposed to be levied for the first two years or a longer period, as recommended by the GST Council. Pre-GST Indirect Taxation India’s Constitution divides taxation powers between centre and states. Both levels of government have some exclusive areas where they can levy tax. Income tax, which includes tax on company profits, is the exclusive domain of central government. These taxes are referred to as direct taxes. Indirect taxes are taxes levied on manufacture of goods, provision of services and consumption. In India, generally speaking, indirect taxes levied on manufacture of goods or provision of services is the exclusive domain of central government. Taxes on consumption are the exclusive domain of state governments. There are two important problems with the current arrangement. For instance, a shirt has to first be manufactured before it is consumed3. The central government, therefore, levies its indirect tax called central excise at the factory gate. 2 E&Y: All About GST in India extracted on Jan. 8, 2016 from 3 Shankaran, Sanjeev: What is GST and how it will affect you extracted on Jan. 8, 2016 from
  7. 7. KUNAL BASU 6 Subsequently, a shirt reaches a retail outlet and is bought by a consumer. The state government, at this stage, levies a tax on consumption dubbed value added tax (VAT). Thus there is another tax at the factory gate which adds to the cost of the shirt and another tax on the final price. Since states have their exclusive domain on consumption tax within their borders, they treat goods coming from other states as “imports.” For example, if a shirt maker in Maharashtra buys dye in Bihar, he would have paid central excise and Bihar’s state taxes on the product. On this cost, the Maharashtra government would levy its tax if the shirt is sold in the state. If the shirt is sent across neighbouring Uttar Pradesh’s border and sold in Delhi, an “export” tax called central sales tax is collected by UP. India is therefore politically one country, but economically it is fragmented. There are multiple taxes when there is commerce across state borders. Consequently, it increases costs for everyone and makes economic activity within India for Indians complicated. Historical Background The Goods and Services Tax (GST) has a historical timeline that stretches back to 1994 when the Amaresh Bagchi Report, suggested the introduction of Value Added Tax (VAT) to act as the root for implementation of Goods and Services Tax in India4. VAT was introduced in 2005 by the Ashim Dasgupta empowered committee that replaced old age taxation system in India. In 2004 the Vijay Kelkar Task Force strongly recommended the integration of indirect taxes into the form of GST in India. The Union Government, for the fiRs.t time in the Union Budget for 2006-07 announced that the GST would be applicable from 1st 4 Daniel, Saju: GST: A timeline extracted on Jan. 8, 2016 from
  8. 8. KUNAL BASU 7 April, 2010. The government formed various Joint Working Groups of state finance ministers to study the impact of GST on the revenue of various States that, after several meetings, reached a consensus-in-principle for implementation of GST in India. The Task force of Finance Ministers submitted their report in December, 2009 on structure of GST in India. Government of India also issued its fiRs.t discussion paper on GST in November, 2009. The Constitution (115th Amendment) Bill was introduced on 22nd March, 2011 and same was referred to Parliamentary Standing Committee on Finance for discussion while the then Finance Minister in his speech announced that the GST would be rolled out by April, 2011. Owing to consistent and often politically motivated opposition from some parties this Bill lapsed with the expiry of the tenure of the Lok Sabha in 2014. Accordingly, the Constitution 101st (Amendment) Bill was introduced in Parliament on Dec. 19, 2014; since due completion of parliamentary terms. The Government of India introduced Constitution 101st (Amendment) Bill that was passed by the Lok Sabha on May 6, 2015 while the Rajya Sabha passed it on Aug. 3, 2016. Levy of GST In keeping with the federal structure of India, GST will be levied concurrently by the Centre (CGST) and the States (SGST) and would be similar in their design. Both CGST and SGST would be levied on the basis of the destination (point-of-consumption) principle. Thus, exports would be zero-rated, and imports would attract the tax in the same manner as domestic goods and services. Inter-State supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the Destination State).
  9. 9. KUNAL BASU 8 Central taxes like, Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty and Special Additional duty and State level taxes like, VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax and octroi will subsume in GST. Petroleum and petroleum products i.e. crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas shall be subject to the GST on a date to be notified by the GST Council. The Act provides for removing imposition of entry tax/octroi across India. Petroleum and petroleum products i.e. crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas shall be subject to the GST on a date to be notified by the GST Council. Entertainment tax, imposed by States on movie, theatre, etc. will be subsumed in GST, but taxes on entertainment at panchayat, municipality or district level to continue. GST may be levied on the sale of newspapers and advertisements and this would give the government’s access to substantial incremental revenues. For the fiRs.t time, with the exception of J&K, states will have the right to tax services. The power to make laws in respect of supplies in the course of inter-State trade or commerce will be vested solely in the Union government. States will have the right to levy GST on intra-State transactions including on services. The Centre will levy IGST on inter-State supply of goods and services. Import of goods will be subject to basic customs duty and IGST. Administration of GST will be the responsibility of the GST Council, which will be the apex policy making body for GST. Members of GST Council comprised of the Central and State ministers in charge of the finance portfolio. To understand the import of GST, it is necessary to comprehend the magnitude of revenue collections in the indirect taxes
  10. 10. KUNAL BASU 9 category5. In 2014-15 (BE), customs collections were estimated at Rs. 2.02 lakh crore, Union excise duties at Rs. 2.06 lakh crore and service tax at Rs. 2.16 lakh crore. Against this, indirect taxes imposed by states were estimated at Rs. 8.65 lakh crore. Indirect taxes account for 67% of the total revenue of Rs. 22.38 lakh crore in 2014-15. Thus GST would cover 67% of the nation’s revenues, hence its criticality to our economy. Today’s mixed scenario is a mixed one. Currently, India has Value-Added Tax (VAT) systems both at the central and state levels. But the central VAT or CENVAT mechanism extends tax set-offs only against central excise duty and service tax paid up to the level of production. CENVAT does not extend to value addition by the distributive trade below the stage of manufacturing; even manufacturers. cannot claim set-off against other central taxes such as additional excise duty and surcharge. Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on previous purchases. The VAT also does not subsume a host of other taxes imposed within the states such as luxury and entertainment tax, octroi, etc. Once GST comes into effect, all central- and state-level taxes and levies on all goods and services will be subsumed within an integrated tax having two components: a central GST and a state GST. This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it, there will be tax only on value addition at each stage, with the producer/seller at every stage able to set off his taxes against the central/state GST paid on his purchases. The end-consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. GST will replace the following central taxes: 5 Ministry of Finance, Govt. of India: Public Finance Statistics 2014-15 extracted on Jan. 8, 2016 from p. 4
  11. 11. KUNAL BASU 10 i. Central Excise Duty ii. Duties of Excise (medicinal and toilet preparations) iii. Additional Duties of Excise (goods of special importance) iv. Additional Duties of Excise (textiles and textile products) v. Additional Duties of Customs (commonly known as CVD) vi. Special Additional Duty of Customs (SAD) vii. Service Tax viii. Cesses and surcharges in so far as they relate to supply of goods or services State taxes that will be similarly subsumed under GST follow: i. State VAT ii. Central Sales Tax iii. Purchase Tax iv. Luxury Tax v. Entry Tax (all forms) vi. Entertainment Tax (not levied by local bodies) vii. Taxes on advertisements viii. Taxes on lotteries, betting and gambling ix. State cesses and surcharges How GST Will Work The GST regime goes step-by-step, across three stages, viz. manufacturing and distribution, wholesale and retail. An example of the same pre-GST shirt would explain how the system works at three stages of its levy6. Stage I: Imagine a manufacturer of, say, shirts. He buys raw material or inputs — cloth, thread, buttons, tailoring equipment — worth Rs. 100, a sum that includes a tax of Rs.. 10. With these raw materials, he manufactures a shirt. In the process of creating the shirt, the manufacturer adds value to the materials 6Indian Express: Goods and Services Tax (GST) Bill explained extracted on Jan. 8, 2016 from tax-economy-explained-2950335/
  12. 12. KUNAL BASU 11 he started out with. Let us take this value added by him to be Rs. 30. The gross value of his good would, then, be Rs. 100 + 30, or Rs. 130. At a tax rate of 10%, the tax on output (this shirt) will then be Rs.. 13. But under GST, he can set off this tax (Rs.. 13) against the tax he has already paid on raw material/inputs (Rs.. 10). Therefore, the effective GST incidence on the manufacturer is only Rs. 3 (13 – 10). Stage II: The next stage is that of the good passing from the manufacturer to the wholesaler. The wholesaler purchases it for Rs. 130, and adds on value (which is basically his ‘margin’) of, say, Rs. 20. The gross value of the good he sells would then be Rs. 130 + 20 — or a total of Rs. 150. A 10% tax on this amount will be Rs. 15. However, under GST, he can set off the tax on his output (Rs. 15) against the tax on his purchased good from the manufacturer (Rs. 13). Thus, the effective GST incidence on the wholesaler is only Rs.. 2 (15 – 13). Stage III: In the final stage, a retailer buys the shirt from the wholesaler. To his purchase price of Rs. 150, he adds value, or margin, of, say, Rs. 10. The gross value of what he sells, therefore, goes up to Rs. 150 + 10, or Rs. 160. The tax on this, at 10%, will be Rs. 16. But by setting off this tax (Rs. 16) against the tax on his purchase from the wholesaler (Rs. 15), the retailer brings down the effective GST incidence on himself to Re. 1 (16 –15). Thus, total GST on the entire value chain from the raw material/input suppliers (who can claim no tax credit since they have not purchased anything themselves) through the manufacturer, wholesaler and retailer is, Rs. 10 + 3 +2 + 1, or Rs. 16. In a full non-GST system, there is a cascading burden of “tax on tax”, as there are no set-offs for taxes paid on inputs or on previous purchases. Thus, if we consider the same example as above, the manufacturer buys raw materials/inputs at Rs. 100
  13. 13. KUNAL BASU 12 after paying tax of Rs. 10. The gross value of the shirt (good) would be Rs. 130, on which the manufacturer pays a tax of Rs. 13. Since there is no set-off against the Rs. 10 he has already paid as tax on raw materials/inputs, the good is sold to the wholesaler at Rs. 143 (130 + 13). With the wholesaler adding value of Rs. 20, the gross value of the good sold by him is, then, Rs. 163. On this, the tax of Rs. 16.30 (at 10%) takes the sale value of the good to Rs. 179.30. The wholesaler, again, cannot set off the tax on the sale of his good against the tax paid on his purchase from the manufacturer. The retailer, thus, buys the good at Rs. 179.30, and sells it at a gross value of Rs. 208.23, which includes his value addition of Rs. 10 and a tax of Rs. 18.93 (at 10% of Rs. 179.30). Again, there is no mechanism for setting off the tax on the retailer’s sale against the tax paid on his previous purchase. The total tax on the chain from the raw material/input suppliers to the final retailer in this full no-GST regime will, thus, work out to Rs. 10 + 13 + 16.30 + 18.93 = Rs. 58.23. For the final consumer, the price of the good would then be Rs. 150 + 58.23 = Rs. 208.23. Compare this Rs. 208.23 — with a tax of Rs. 58.23 — to the final price of Rs. 166, which includes a total tax of Rs. 16, under GST. In practice, GST has the potential to dramatically lower indirect taxes while cheaper compliance costs may add to the benefits of greater domestic and international market competitiveness and lower prices for consumers. Some Salient Features of the GST Act Some salient features of the GST Act follow7: 7 E&Y: All About GST in India extracted on Jan. 8, 2016 from
  14. 14. KUNAL BASU 13 i. The power to make laws in respect of supplies in the course of inter-state trade or commerce will be vested only in the Union Government. States will have the right to levy GST on intra-state transactions, including on services. ii. The Centre will levy IGST on inter-state supply of goods and services. Import of goods will be subject to basic customs duty and IGST. iii. GST is defined as any tax on supply of goods and services other than on alcohol for human consumption. iv. Central taxes such as Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty and Special Additional duty as well as state-level taxes such as VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax and Octroi will subsume in GST. v. Petroleum and petroleum products, i.e., crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas, shall be subject to GST - date to be notified by the GST Council. vi. Provision will be made for removing imposition of entry tax/Octroi across India. vii. Entertainment tax,, imposed by states on movie, theatre, etc., will be subsumed in GST, but taxes on entertainment at panchayat, municipality or district level will continue. viii. GST may be levied on the sale of newspapers and advertisements. This would mean substantial incremental revenues for the Government. ix. Stamp duties, typically imposed on legal agreements by states, will continue to be levied. x. Administration of GST will be the responsibility of the GST Council, which will be the apex policy making body
  15. 15. KUNAL BASU 14 for GST. Members of GST Council comprise Central and State ministers in charge of the finance portfolio. Role of the GST Council As per Article 279A (1) of the amended Constitution, the GST Council was to be constituted by the President within 60 days of the commencement of Article 279A. The notification for bringing into force Article 279A with effect from 12th September, 2016 was issued on 10th September, 2016. As per Article 279A of the amended Constitution, the GST Council will be a joint forum of the Centre and the States8. This Council shall consist of the following members namely: - i. Union Finance Minister: Chairperson ii. The Union Minister of State, in-charge of Finance (Revenue): Member iii. The Minister In-charge of finance or taxation or any other Minister nominated by each State Government: Members As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws, principles that govern Place of Supply, threshold limits, GST rates including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc. The GST Council would decide on all future hikes in the basic GST rate and decide on the quantum to be transferred to states. The Centre would have 33% of votes while the balance will be exercised by the States as members. Even if this Council’s 8 Press Information Bureau, Govt. of India: Press release extracted on Jan. 8, 2016 from
  16. 16. KUNAL BASU 15 decisions are made on 66% majority basis, and the ruling party at the Centre with its same-party/coalition partner states cross the 15+1 vote mark (29 states and the Union), this could place states ruled by opposition parties at a distinct disadvantage. Plusses of GST Debate on the positives and negatives on the GST Act are evenly dispersed. On the positive side, experts’ claim that a unified market would emerge, that would make investment easier and enable Indian goods and services to compete in the global market. Manufacturing may become more competitive as GST addresses cascading of tax, inter-state tax, high logistics costs and fragmented market. Increased protection from imports as GST provides for appropriate countervailing duty. It would dramatically reduce leakage of revenue and cut down on corruption that is endemic to the present fragmented indirect taxation structure. Harmonization of centre and State tax administrations would reduce duplication and compliance costs while automation of compliance procedures would reduce errors and increase efficiency. A current market fragmented along state lines raises costs of administration and compliance, etc. by up to 20-30%. Checks at state borders slow movement of trucks. In India, they travel 280 km a day compared with 800 km in the US9. For many capital goods, input tax credit is not available. Full input tax credit under GST will mean a 12-14% drop in the cost of capital goods. Expected objectives are 6% rise in capital goods investment, and 2% overall10. The current 2% inter-state levy implies production is limited mostly within a state. Under the GST national market, 9 Economic Times: GST: Here are the 10 benefits of the Bill extracted on Jan. 8, 2016 from bill/3-a-common-market/slideshow/53518586.cms 10 Note (5)
  17. 17. KUNAL BASU 16 this can be dispersed, creating opportunities for others. Inter- state procurement could lead to consolidated supply chains while removal of tax at manufacturing point would mean radical changes in distribution of goods and concomitant reduction in costs of doing business seamlessly across states. Removal of the concept of excise duty on manufacturing may improve cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory. Interest on working capital would therefore decline. State restrictions and levies have complicated ecommerce with many sellers not shipping to particular states. This is expected to end with the emergence of a unified market. All this will end with GST. HSBC estimates an 80 basis point rise in GDP growth over 3-5 years11. NCAER pegs this at 0.9-1.7% owing to the elimination of tax cascading. States and Centre will have dual oversight of a common pool of larger resources. Principally therefore, GST is a laudable reform. Minuses of GST On the flip side, a substantial percentage of the gross indirect taxes collection of Rs. 14.89 lakh crore (Centre + States) in 2014-1512, Rs. 3.32 lakh crore, on account of tax/duty on electricity, POL and alcohol for human consumption (that accounts for the vast majority of state excise collections) are presently excluded from the ambit of the GST Act. In effect about 18-20% of all indirect taxes will be excluded while computing the basic GST rate. Any hike in these duties/taxes subsequently will therefore add to the basic GST rate. There is no agreement on the basic GST rate with ranges of 15-24% being suggested by the Union and States. The higher the basic 11 Note (5) 12 Ministry of Finance, Govt. of India: Public Finance Statistics 2014-15 extracted on Jan. 8, 2016 from, p. 4
  18. 18. KUNAL BASU 17 GST rate greater the propensity to evade GST and counter- productive recourse to generation of black money. Conversely, a lower GST rate would incentivize mass compliance on volumetric basis and substantially enhance revenues for governments. The destination-based GST may work to the disadvantage of major manufacturing states like Tamil Nadu that derived their revenue at the point of manufacture. Now that the GST will be collected at the final point of consumption, populous and often averagely administered states like Bihar would generate higher GST revenue and become eligible for larger share of GST revenues from the Centre. There would be little incentive for states to attract investment, instead promote consumption that is self-defeating. Likewise, states with relatively low populations, hence lower consumption and GST share, but located in desert, hilly or remote terrain (such as in NE India) and attendant higher infrastructure and administration costs may be sufferers. How GST would tie in with the 14th Finance Commission’s accepted recommendations also remains to be seen. Consumption-based GST on a standard formula may prove deleterious to the needs of states, particularly in NE India. Their limited GST share may be compounded by virtual nullification of Centrally-sponsored/aided schemes from 2015-16 and onward, apart from persisting relatively high inflation. Their representation on the GST Council is unlikely to help much, particularly if they are ruled by opposition parties. In the successful passage of the GST Act, states would indubitably lose their larger share of the flexibility of targeting development funds or flexing them to attract investment, both of which are state-specific. In sum, the Govt. of India with its veto power in the GST Council assumes an unassailable position in the finances of a state and, by logical extension, over its politics,
  19. 19. KUNAL BASU 18 enough reason for resistance by states that perceive a ‘raw’ deal in the process of the state GST Acts. This is probably why neither the US nor the EU, nor Scandinavia – all federations - adopted GST. GST is technology driven. While the Govt. of India proposes to train about 60000 personnel to operate the collection, accounting and transfer of state share systems, GST would require extensive complimentary training at every level of the procurement-manufacturing-intermediates-sales chain. In addition, small retailers would have to invest in expensive electronic hardware and real-time Internet connectivity coupled with hiring trained personnel that may not be easily available for the first few years. GST would therefore need a reliable high- speed backbone and reliable distribution networks with cent per cent up time in a nation where the frequency of dropped mobile calls and erratic data transfer lines is amongst the highest in the world. Similarly, banks in remote parts of the country would also require trained personnel and hardware (and problematic maintenance) to receive and account for GST receipts. Rates of GST The 13th Finance Commission proposed a Revenue-Neutral Rate of 12% while the Kelkar Committee proposed 20%. From time to time the rates proposed by the Govt. of India ranged from 12- 20%. The National Institute of Public Finance and Policy (NIPFP) proposed GST Rates (based on various assumptions) based on permutations and combinations of various factors: Sugar and Textile industry, CST Rates, Entry Tax etc. and derived 16 alternatives in which rates varied from 18.53% to 26.68%13. On Nov. 3, 2016 the GST Council approved a four-tier GST rate 13 Petroleum Federation of India: Round Table on Impact of GST, presentation by Petrofed, extracted on Jan. 8, 2016 from gst
  20. 20. KUNAL BASU 19 structure, the final slab rates being agreed upon being 5%, 12%, 18% and 28%. The final GST slab rates are: i. Zero rated items: Food grains used by common people ii. 5% Rate: Items of mass consumption including essential commodities will have low tax incidence. iii. 12% and 18% Rate: Two standard rates have been finalised as 12% and 18%. iv. 28% Rate: White goods like Air conditioners, washing machines, refrigerators, soaps and shampoos etc. that were taxed at 30-31% shall be now taxed at 28%. v. Demerit goods like tobacco, tobacco products, pan masala, aerated drinks and luxury cars shall be charged at the highest rate of 28%. vi. An additional cess on some luxury goods shall also be imposed. vii. Services that are now taxed at 15% shall be taxed at a higher rate of GST @ 18%14. However, the key to the success or failure of GST is the basic tax rate and fairness in the distribution of GST revenue. India has no social security system, hence bears no comparison to high rates of up to 25% in some developed countries. While limited exemptions are welcome, yet Australia with a 10% basic GST rate exempts basic foodstuffs, water, sewerage and drainage services, health, education, religious and related supplies, child care, supplies of going concerns, and international transport and mail, etc. Likewise, New Zealand with a 15% basic GST rate has generous social security and health care for its citizens. Likewise Canada’s GST/HST rates are in the range of 5-15%, Austria and France at 20%, Germany at 19%, Belgium 21%, Denmark 25%, Japan 5% consumption 14 Fintrakk: GST: What is the impact of GST on the common man? Extracted on Jan. 9, 2016 from
  21. 21. KUNAL BASU 20 tax, Malaysia 5-10%, Netherlands 6-19%, Norway 25%, Russia 18% and China at 17%15. Then, shouldn’t India’s basic GST rate be in the range of 10-12% without exemptions and no social security? Cost Impact of GST on Some Sectors However, what is intriguing is that the GST Act defines services as anything other than goods with no clarity on treatment of works contract, IPR, software etc. Industry experts have assumed an average rate of 18% as GST16. Based on such assumption, the succeeding paragraphs briefly analyse the broad impact of GST on a selected group of Indian industry. Information Technology By eliminating multiple levies GST will allow deeper penetration of digital services. The long disputed issue of canned software taxation may also come to end as there would be no difference between goods and services in the GST regime17. On the negative side, IT companies may have several delivery centres and offices working together to service a single contract. With GST, companies might require each centre to generate a separate invoice to every contracting party. Duty on manufactured goods is expected to go up from existing 14-15% to 18%, which means the cost of the cost of electronics from mobile phones to laptops, may rise. 15 GNV Consultancy & Services Pte. Ltd: World Corporate and Income Tax Comparison Rates, VAT/GST around the world extracted on Jan. 8, 2016 from 16 Economic Times: GST impact across sectors: Take a look at the winners and losers extracted on Jan. 8, 2016 from look-at-the-winners-and-losers/articleshow/53532907.cms 17 Note (14)
  22. 22. KUNAL BASU 21 Fast Moving Consumer Goods Companies could potentially generate substantial savings in logistics and distribution costs as the need for multiple sales depots would be eliminated. FMCG companies pay nearly 24- 25% including excise duty, VAT and entry tax. GST at 17-19% could yield significant reduction in taxes. Warehouse rationalisation and reduction of overall tax rates, is expected to generate saving which could cumulatively range between 200- 300bps. GST will also address the challenge of tax leakages in supply chain when procured products through contract manufacturing. Key beneficiaries could be companies like Hindustan Unilever, Colgate, GSK, Asian Paints, etc. E-Commerce A single unified market across India and free movement and supply of goods in every part of the country created by GST will also eliminate the cascading effect of taxes on customers which will bring efficiency in product costs. On the flip side, tax collection at source (TCS) guidelines in the GST regime will increase administration, documentation workload for ecommerce firms and push up costs. The mandate of tax collection by states from e-commerce companies could result in significant compliance burden on e-commerce companies and credit build-up along with cash flow issues for the vendors listed on the marketplaces. Also, the supplies reported by the e- commerce firm will be matched with the details given by the supplier in the return for outward supplies and in case of a mismatch; the output liability of the vendor will be re- determined. This is likely to put a lot of burden on e-commerce players from documentation and compliance perspective. Accounting for cash on delivery, returns and cancelled orders may impact cash flows for e-commerce companies known for discounting and subsidizing of products or offering free goods.
  23. 23. KUNAL BASU 22 Under GST, freebies are expected to be taxed creating additional burden on the sellers18. Telecommunications Handset prices may decline/even out across states. Manufacturers may be expected to pass on to consumers cost benefits they will get from consolidating their warehouses and efficiently managing inventory. For handset makers, GST will bring in ease of doing business as they may no longer need to set up state specific entities and transfer stocks to them and invest heavily into logistics of creating warehouses in each state across the country. The Telecom sector which is paying 14% tax will rise to 18% and companies would expectedly pass the burden on to post-paid customers. There will also a lower input tax credit in this sector’s capex cost. Overall, this regime will be negative to the industry and the sector will also be in state where they cannot pass the entire tax burden to the consumers especially their prepaid segment with lower average revenue/user (ARPU). One of the biggest impact areas of GST is the compliance requirements that the tax reform brings with it. As against a single registration and merely two-three returns, the proposed legislation would require telecom companies to file manifold returns per year, apart from separate assessments and audits in each of the States. The concept of credit matching being ushered in with GST, is likely to add to transparency, but would be tough to implement. Besides, the new regime may open a Pandora’s Box relating to taxability of SIM cards, recharge coupons etc.19 18 Note (14) 19 Sapra, Bipin: Impact of GST on the Telecom sector in the Economic Times extracted on Jan. 8, 2016 from the-telecom-sector/1702
  24. 24. KUNAL BASU 23 Automotive Under the GST regime, with no embedded tax costs on inter- state movement of goods (CST or entry taxes) and a shift in the point of taxation to the consumer ultimately, businesses shall have greater flexibility to re-design their supply chains and thus, optimize logistics costs. Since their vendors are also likely to benefit from the transition, companies could negotiate with their vendors to pass on those benefits in terms of input prices. However, there are various aspects which need to be resolved in order for the auto industry to be geared for the GST regime. Some prime issues being treatment of ongoing area based exemption schemes (from Central Excise perspective) and the State level incentives in form of subsidy or deferment, continuation of end use based exemptions (e.g. for vehicles used as taxis or ambulances) and the continuation of export incentives linked to indirect taxes. At present the automobile OEMs transfer vehicles from their manufacturing units to their dealer network spread across the country through one of the following modes: i. Direct transfer of vehicles to the dealer (dealer liable to pay CST) ii. Stock transfers to own warehouses in the consumption state and further transfer from the warehouse to the dealer (no CST applicable on the transfer of vehicle from the manufacturing unit to the warehouse, hence no input credit available to the OEM. Dealer is not liable to pay CST. In the first scenario, though the dealer pays CST, it cannot set- off the same against its VAT liability (VAT is payable by the dealer in both the above scenarios). The GST will enable the auto dealers to get input tax credit for the GST paid by them at
  25. 25. KUNAL BASU 24 the time of acquiring the vehicles from the OEMs. Similar benefit will accrue to them on the spare part/service businesses20. Currently, automobile sector pays around 30 to 47% tax which is now expected to be in the 20-22% range, after the implementation of GST. Overall cost benefit can be expected for the end user by around 10%. Transportation time should also be reduced as the check points and octroi is cleared hands before. Under GST, importer-distributors as well as domestic resellers should be able to claim credit of GST paid on all business procurements of goods and services, as opposed to the current scenario, where they cannot claim a credit for the duties/ taxes paid on capital assets and input services availed. With no embedded tax costs on inter-state movement of goods (CST or non-creditable entry taxes), automakers would have greater flexibility to re-design their supply chains and thus, optimize logistics costs. Automobile exports should also benefit with the elimination/ reduction in embedded tax costs. On-road price of vehicles could drop by 8%, as per a report by Motilal Oswal Securities, providing indirect stimulus to boost volumes. Key beneficiaries would include Maruti Suzuki, M&M; Eicher Motors', etc. whose profit margins may expand. The following graphic provides a quick view calculation of pre- and post-GST on the price of a small budget car21: Current GST In Rupees Manufacturer’s price 3,00,000 300000 Total taxes at manufacturing stage (*includes excise duty, infra cess, VAT, octroi) 141690 (47.23% total tax)* 54000 (18% GST) Cost to dealers 4,41,690 3,54,000 Margin @10% 44169 35,400 20 CARE Ratings: GST Impact on various sectors extracted on Jan. 9, 2016 from ST%20on%20select%20industries.pdf, pp. 2-3 21 FAPL: Is Goods & Services Tax (GST) Simply Overrated? Extracted on Jan. 9, 2016 from
  26. 26. KUNAL BASU 25 Sale price for dealers 4,85,859 3,89,400 VAT/GST 60732 (12.5%) 70,092 (18%) Net VAT/GST (after claiming credit) 12,558 16,092 Price to retail customers 5,46,590 4,59,493 On the negative, demand for commercial vehicles may be hit in the medium term. GST will subsume local taxes, reduce time at check-posts, and ease logistics hurdles. With fleet productivity increasing, operators may not feel the need to expand mid-term, choosing instead extract greater benefit from their existing fleets whose mileage per day would substantially increase. However, the main issue facing the auto sector is the ambiguity regarding rate of GST - whether there would be a differential rate for mid-segment/ luxury-segment cars, as recommended by the CEA's report on GST rates? If yes, how would the segments be defined and what would be the delta in the rates vis-à-vis small cars or the RNR, is the big question on industry's mind. Debate also centres on the fate of incentives that have been promised to various automakers while setting up of their manufacturing plants by respective State Governments in the form of VAT/ CST linked subsidies and/ or deferment of taxes. Any change in the agreed terms for disbursal of such incentives would have an impact on the ROI from manufacturing operations; consequently also impacting decision-making by the Auto sector on infusion of additional capital investments in India22. The Model GST Law is also silent on the treatment of used-car sales. A major part of the pre-owned vehicle sales presently take place in the unregulated market space and the GST rules 22 Businessworld: Impact Of GST On Various Sectors In India extracted on Jan. 8, 2016 from 104041/
  27. 27. KUNAL BASU 26 regarding the same would be a determinative factor for inclusion of this segment within the GST net. Media DTH, film producers and multiplex players are levied service tax as well as entertainment tax. GST will bring major change and uniformity in businesses with taxes declining by 2-4%. Multiplex chains are expected to save on revenues as there would be a uniform tax, unlike currently high rate of entertainment tax levied by different states. It may lower the average ticket price, and increase the footfalls in multiplexes. DTH and cable television services are expected to become cost effective under the GST regime. However, the quantum of DTH and cable bill would depend on the levy of entertainment tax. While service tax and state level entertainment tax will be subsumed in GST, the effective entertainment tax incidence is expected to decline. However, the overall impact on the tax and revenue side will depend on the quantum of entertainment tax imposed by local bodies. Further, under the GST regime, the tax cost on procurements for DTH and cable service providers should reduce on account of larger availability of credits. GST may also be a big boon to film producers and studios that currently pay service tax on most of their cost, but cannot charge input credit on creative services (payments to artists etc.) as they fall under the negative list. Under GST, they will be able to claim credit of these services also, which will help is lowering the overall cost. Key beneficiaries are expected to be Dish TV, PVR, etc.23 Insurance Life, health and motor insurance policies: will cost more from April 2017 as taxes will go up by up to 300 basis points from 23 Notes (13) & (14)
  28. 28. KUNAL BASU 27 15% to 18%. Insurance premium apart from including risk element also includes expenses related to policy issuance, intermediary commission, etc. which could be lowered by the insurers to compensate the effect of enhancement of service tax in the new GST era. However, with the increase in insurance premiums, there will be close competition among insurers for offering the best insurance proposition to the consumer, which would be beneficial for the consumer24. Cement Currently this sector is taxed at 27-32%. Post- GST, this will improve the sector growth in various terms, like transportation by 20-25% per cent and in the warehouse scheme as the rationalization would be easy in an unified market and also in the transportation cost as also reduced transit time25. Aviation Aviation Turbine Fuel (ATF) outside the purview of GST: ATF will not be included within the GST regime and therefore the Central and State governments will continue to impose excise duty and Value Added Tax (VAT), respectively. Since the levy of these taxes will not be creditable for carriers under the GST regime, it will result in a cascading effect of taxes. While the current service tax abatements are conditional on carriers not availing credit of ATF, the increased GST rate coupled with the non-inclusion of ATF (which forms 30-35% of the input cost for carriers) will significantly burden the aviation sector and 24 Moneycontrol: How does GST impact your insurance premium? extracted on Jan. 8, 2016 from premium_7444121.html 25 SAG Infotech: Impact of GST Bill on Different Sectors in India extracted on Jan. 8, 2016 from
  29. 29. KUNAL BASU 28 therefore, there is a strong case for a merit rate of GST for air travel26. Increased compliance costs: Under the existing tax regime, carriers are only required to take a single service tax registration. The Model GST Law prescribes registration in each State where a carrier undertakes a supply. Carriers will thus have to register in every State where the registered passenger is located and also in each State from where its flights originate. Further, the carrier will also be required to upload onto the GST Network, invoice wise details of supplies made to registered persons. These compliance requirements will result in escalation of costs of doing business27. Possible increase in ticket prices: Flying is expected to become more expensive as service tax will be replaced by GST. Service tax on fares currently ranges between 6% and 9% (depending on the class of travel). With GST, the rate will surpass 15%, if not 18%, effectively doubling the tax rate. Currently, air travel attracts service tax @ 6% for economy travel and 9% for non-economy travel. Though the GST rate has not been announced, the Chief Economic Advisor has suggested a rate of 17%/18%. A GST rate of 18% may lead to a 9% to 12% increase in the cost of air travel for passengers, thus hampering the growth of the industry28. It may be relevant to note that the lower rate of service tax for air travel is subject to the carriers not availing credit of inputs, which primarily comprises the aviation turbine fuel (accounting for approx. 35% of the cost of the carriers). Under the GST also, the carriers would not be able to take credit on aviation turbine 26 Trilegal: Impact of GST on the Aviation Sector extracted on Jan. 8, 2016 from 27 Note (20) 28 PWC: Decoding the draft GST law: Impact on Aviation sector extracted on Jan. 8, 2016 from _law-impact_on_aviation_sector.pdf, p. 3
  30. 30. KUNAL BASU 29 fuel (which would be kept outside the ambit of the GST). In such circumstances, it is imperative that the carriers ask for a lower rate of GST on passenger travel. Further, the Model Law contains provisions for zero-rating on exported goods or services. However, the Model Law does not envisage zero-rating of international air travel. Lastly, the Model Law is silent on whether the current service tax exemption on flights to/ from specified airports in the North East region would continue under the GST. Issues around valuation to continue and may get aggravated: Another key concern for the carriers is the valuation of their service. At present, most carriers are litigating on the aspect of valuation of their service. It is the contention of the carriers that levies by Governments and airports on the passengers, which are collected by the carriers, do not form a part of revenue of the carriers, and should not be included in the service value. The current regime has a specific exemption for taxes levied by Governments on the passengers. However, the Model Law stipulates that taxes, duties, fees and charges levied under any statute would be included in the value of the service. This seems to indicate that the intent of the Government is to tax all such duties and levies, irrespective of the fact that such levies may be by an overseas Government or airport. This valuation issue gets further compounded by the fact that valuation provisions brought in for services/ goods in a similar manner as they exist under the current Customs law for import of goods. Under these valuation provisions, the value can be rejected on the basis of different prices charged for contemporaneous services. Tickets sold at varying prices to customers may be rejected by the authorities and taxed at a higher price. The tax authorities also seem to have been given
  31. 31. KUNAL BASU 30 overarching powers to reject the value declared for the services. This specific provision can play mischief for the carriers. Aircraft lease/ purchase now taxable: Currently, carriers are not required to pay any indirect taxes on lease of aircraft into India (as Customs duty on import of aircraft is exempt and the transaction is beyond the jurisdiction for levy of VAT). Only in case of a finance lease arrangement, service tax is applicable on 10% of the lease rentals. Under the Model GST law, leasing of goods (i.e. aircraft) would qualify as a service and attract GST in the hands of the carrier, unless a specific exemption is provided. Though the carrier may eventually be able to take input tax credit of the GST paid, the upfront payment is likely to have huge cash flow implications. Similarly, purchase of aircraft would qualify as a sale of goods and would attract GST in the hands of the carrier. Though the carrier may eventually be able to take input tax credit of the GST paid, the upfront payment is likely to have huge cash flow issues. Increase in maintenance costs: Currently, maintenance and repair of aircraft undertaken outside India do not attract service tax in the hands of the recipient carrier. However, per the Model Law, services rendered by overseas MROs attract GST in the hands of the domestic carriers even if the services are performed outside India. Though the carrier should be entitled to input tax credit of the GST paid, it could impact cash flows. Further, parts/ spares imported into India and supplied to the carrier (for use in repair/ maintenance of the aircraft) are currently exempt from levy of customs duties. However, as yet, no specific exemption has been envisaged under the GST on such supplies. Multiple taxation on maintenance removed: Currently, both VAT and Service tax is applicable on maintenance activities
  32. 32. KUNAL BASU 31 undertaken in India (referred to as ‘works contract’). This has resulted in higher tax burden for the MROs. The Model GST Law specifies that works contract (including any transfer of property in goods in the execution of such contract) would be taxed as a service. This is a welcome move and should provide certainty on taxability of the MRO sector. Import of parts costlier in absence of duty exemption: Parts/spares imported into India for use in repair/ maintenance of the aircraft are currently exempt from levy of customs duties. However, as yet, no specific exemption has been envisaged under the GST on such supplies. Textiles Presently, the textile industry has been divided into 9 broad categories for the purpose of taxation. These include cotton textile, woollen textile, silk textile, artificial silk, synthetic fibre textile, khadi and handlooms, jute, hemp and mesta textiles, carpet weaving, ready-made garments and miscellaneous textile products. The current taxes vary from 4% to 12% based on these categories. Further, textile sector is dominated by unorganized players who are given tax exemptions on the basis of size of their operations. All these factors result in a number of key concerns for the textile sector which include: i. Dispute over fabric versus garment classification: e.g. Sarees ii. Differential taxation for cotton and manmade fibre: Zero duty for cotton fibre as compared to high excise duty structure of nearly 12.5% on manmade fibre segment iii. Composite mills are taxed at a higher rate than the power looms discouraging integration of production
  33. 33. KUNAL BASU 32 iv. Also, the current taxation is production based leading to blocked input taxes which results in higher cost of production. With the implementation of GST, there will be a uniform rate of tax which will result in: Blocked input taxes will be eliminated as GST is a consumption tax Zero rating on exports under GST will boost exports further without the need for explicit subsidy schemes Level-playing field will be provided to all textile segments Integration of production will be encouraged resulting in increased efficiency Goods movement within the states will also be much easier as lot of local state taxes which are levied on the borders of states which inhibit free movement of goods will be removed. This will help in improving the productivity & efficiency of the textile industry as now more factories/manufacturing units can be set up in various textile hubs across India without worrying for various state taxes which were earlier levied indirectly29. Furthermore, under GST, textile players which are oriented towards domestic markets will be able to avail input tax credit (ITC) on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets. However, there is no clarity about the impact of GST on this sector but the output tax rate will be negatively impacted. Therefore, various export 29 CARE Ratings: GST Impact on various sectors extracted on Jan. 9, 2016 from ST%20on%20select%20industries.pdf, pp. 1-2
  34. 34. KUNAL BASU 33 companies, will get some extra benefit from the duty drawback from the new GST implementation30. In ICRA's31 view, a 12% (lower) rate recommended by the Arvind Subramanian Committee is likely to have a negative impact on the textile sector, especially the cotton value chain, which is currently attracting zero central excise duty (under optional route); unlike the man-made fibre sector, where the fibre attracts excise duty at the manufacturing stage (unlike cotton). Hence there is an incentive for the downstream players in manmade sector to avail ITC. ICRA points out that the most of the cotton based textile players in the value chain operate through the optional route, thereby resulting in lower duties. The key reasons for the same are exemption on cotton and hence the lower ITC for cotton spinning mills; as a result cotton yarn manufacturers opt for the optional duty route without claiming ITC and pay zero excise duty32. Pharmaceuticals The biggest advantage to the industry would be that of reduction in transaction cost, with an immediate impact coming from the discontinuance of CST. The multistage taxation along with the inability to take full benefit of the CENVAT credit /refund has been an issue for the industry. With central GST expected to be a single rate for goods and services, going forward credit accumulation may not be an area of concern. Furthermore, the legislation provides for carrying forward of the unutilised credit that would be an additional boost to the industry. Furthermore, the pharmaceutical sector currently 30 Note (18) 31 ICRA: Indian Textile Sector: Impact Analysis of GST extr5cated on Jan. 8, 2016 from, p. 3 32 Ghoshal, Sutanuka: GST rate at 12% will negatively impact textile sector: ICRA,l Economic Times, extracted on Jan. 8, 2016 from 12-will-negatively-impact-textile-sector-icra/articleshow/53652607.cms
  35. 35. KUNAL BASU 34 enjoys various location based tax holidays on its manufacturing activities. Under the proposed structure of GST, such area based exemption will be done away with. However, taking into account past precedents suitable work around/refund process would be constituted to ensure that any existing hubs do not get impacted and continue to get the agreed benefits. GST would bring everything on a single and same platform for all. It would bring more transparency in the system. However, GST is not likely to impact financial or operational performance of the companies in a notable manner33. The impact could be neutral as the sector only pays 6% tax. It also avails incentives in tax benefits arising from geographical location. There are various concessional benefits and exemptions held for this sector and will extend till the expiry of the assured period. The implications of GST would however, reduce the logistics cost and inverted duty structure34. Transition provisions for imported goods35: The transition provisions provide that the credit balances which were admissible under the present regime would be carried forward under GST. In case of stocks of imported finished goods, Countervailing Duty is not admissible under the present regime, and in case of goods procured from contract manufacturers also, Excise Duty credit is not available. Accordingly, based on these provisions, under the GST regime, such stocks would suffer double taxation. Taxability of Free Supplies: Supply of goods between persons without consideration is deemed to be a ‘supply’. Accordingly, 33 CARE Ratings: GST Impact on various sectors, extracted on Jan. 9, 2016 from ST%20on%20select%20industries.pdf, pp. 2-3 34 Note (18) 35 PWC: Decoding the Model GST law: Impact on the Pharma sector extracted on Jan. 8, 2016 from _law-impact_on_the_pharma_sector.pdf, p. 3
  36. 36. KUNAL BASU 35 stock transfer of promotion materials/ free samples will be subject to GST. Subsequent supply of the said promotion materials to stockists/ end customers will also attract GST. Financial Services In India, most of the banking and financial services are exposed to service tax, at the rate of 14.5 percent, while GST is expected to be 18 percent to 20 percent. Thus, services are likely to get costlier. GST may make things cumbersome as financial service providers may be required to adhere to compliances across multiple states instead of the current single, centralised registration compliances. Also, as GST is a destination-based tax, it might be a challenge to determine the destination of certain services (at present, services are taxed at the place of rendering the service). This may lead to a difficulty in determining state GST, central GST or inter-state GST on B2B and B2C transactions. Interest on loans, trading in securities, foreign currency and retail services are also expected to fall within the ambit of GST. Recommendations by the banking industry suggest that such services and income should not come under GST. It is still to be seen whether these recommendations will be accepted. Presently, as per the definition of the term, ‘service’, only those activities which have a consideration are liable to service tax. However, the Model GST Law also proposes to tax services by a taxable person to another person in the course of furtherance of business, without any consideration. This proposal could have far reaching implications, as identification and value attribution for such supplies could be challenging. For example, customers
  37. 37. KUNAL BASU 36 maintaining minimum account balance are eligible for certain benefits and such free services could be subject to GST36. Sale of Repossessed Assets: Under the VAT laws, taxability of sale of repossessed assets in the hands of Banks/ NBFCs has been a contentious matter. Various courts have confirmed the applicability of VAT on Banks/ NBFCs and the matter is now pending before the Supreme Court. In the Model GST Law, if Banks/ NBFCs are treated as suppliers of such assets, the overall cost of operations for Banks/ NBFC’s would go up, as it is expected that the rate of GST would be higher than the present VAT rate. Overall, it appears that imposing GST on banking and financial services may become a challenge and India, if successful, will chart a new course, which could well become a model for the rest of the world37. Overall operations costs will likely increase leading to a concomitant rise in loan processing fees, debit/credit charges, insurance premium, etc.38 Real Estate Implementation of GST will result in reduction in property prices. At present, the developers pay various non-creditable taxes like excise duty, customs duty, CST, entry tax, etc. on the procurement side, and the buyers pay service tax and VAT on purchase of residential units when booked prior to their completion. GST will replace these multiple taxes with a single tax and will also ensure smooth flow of credits through the chain. Hence, it is expected that GST will reduce the 36 PWC: Decoding the Model GST Law: Impact on Financial Services sector extracted on Jan. 8, 2016 from del_gst_law-impact_on_the_financial_services_sector.pdf , p. 4 37 Forbes India: Rajya Sabha passes GST Bill: How it will impact various sectors extracted on Jan. 8, 2016 from how-it-will-impact-various-sectors/43877/1 38 Note (18)
  38. 38. KUNAL BASU 37 construction cost incurred by the developers and thereby help in reducing the current level of property prices. However, high GST rates may offset any possible gains on incremental credits. GST may also result in improved inflow of foreign funds in the real estate sector, as implementation of GST may attract overseas investors for its relative ease of business39. Yet, transfer of (completed) properties may continue to be outside the purview of GST and be liable only to applicable stamp duties, a dampener for buyers. In case this sector is brought within the ambit of GST, it is likely to result in transparency, which would significantly reduce tax evasion through more efficient transaction-tracking methods, and improved enforcement and compliance. Since GST may be levied on a single value, the current issue of levying tax on tax (VAT on central excise duty) is likely to be removed. At present, developers pay various non-creditable taxes on supplies. GST may replace these multiple taxes with a single tax; credit on supplies may also be available, thus reducing costs for all players. However, if real estate output is exempted, then input GST credit could be a substantial cost for the sector, resulting in blockage of credit and higher costs to end consumers40. The Model GST law clearly mentions input credit will not be available for goods and services purchased for execution of work contracts. There are two classes of judicial opinions of whether construction of residential complex is a work contract or not. If it is treated as a work contract, cost of developer may not reduce at all after GST implementation. Presently government no input credit is allowed if the composition scheme (i.e., abatements for cost of land and goods) is used by developers for 39 CARE Ratings: GST Impact in India, extracted on Jan. 9, 2016 from ST%20on%20select%20industries.pdf, p. 4 40 Note (21)
  39. 39. KUNAL BASU 38 calculating service tax and VAT. Therefore it is probable that cost of under construction residential unit may increase post- GST implementation. Travel, tourism and hospitality India’s travel, tourism and hospitality industries have multiple taxes, levied by both the centre and the states. It is expected that under GST, supplies of hotels and restaurants will be subjected to a single tax. At present, no credit is available on input services related to renovation or construction of hotels and resorts. This is expected to change under GST. R&D cess, payable on franchise fees and technical know-how, is likely to be subsumed under GST, thus simplifying compliance procedures and reducing multiple taxes. However, it is unclear whether various benefits available under the existing Foreign Trade Policy will continue under GST. If such benefits are provided, input credit may not be available, resulting in higher costs. On the whole, GST is likely to eliminate multiplicity of taxes and lack of credits. However, it may also lead to increase in tax rates41. Health Care One of the major concerns of this industry is the current inverted duty structure that adversely affects domestic manufacturers, cost of inputs being higher than output. This discourages investment in this industry. GST may either remove the inverted duty structure or allow refund of accumulated credit. This would be a boon for this industry and can act as its growth catalyst. The current cascading tax structure on import duty makes it expensive for the industry to import machinery. GST is likely to reduce this cost. This sector enjoys several tax exemptions and 41 Note (21)
  40. 40. KUNAL BASU 39 benefits. It is still not clear whether these benefits will continue under GST. Health insurance and diagnostic centres, which are mainly service-oriented, may fall under higher tax rates, thereby making such services more expensive for consumers42. Alcoholic beverages Alcohol for human consumption is proposed to be kept outside the GST regime, and will hence continue to attract state excise and VAT; however, inputs are likely to fall under the ambit of GST. Consequently, there may be blockage of input credit, leading to increased production cost and inefficiency in production and distribution. higher input costs and its cascading effect on taxes may push prices upwards, and may also hit exports. Restaurants and bars serving alcohol, and selling both GST and non-GST products, may be required to undertake dual compliance (for GST and non-GST products)43 that may raise operating costs and make F&B dearer for consumers. Education The education sector currently enjoys various tax exemptions and benefits; services provided by schools and colleges are either not taxed or are covered in the negative list. The situation is likely to continue even after the implementation of GST. In case it does not, the sector may be able to avail of input credit or CENVAT credit on the duty paid on purchase of inputs and services. These are likely to bring down the final cost for the industry44. If not, tax component will also increase by 3-5% resulting in an increase of cost of services to the end user i.e., students45. 42 Note (21) 43 Note (21) 44 Note (21) 45 GST Taxation : Impact of GST on Education sector extracted on Jan. 8, 2016 from
  41. 41. KUNAL BASU 40 Renewable Energy One of the main energy sub-sectors to be impacted post the implementation of GST is renewables. The sector currently enjoys various fiscal incentives like 100% tax holiday on earnings for ten years and concessional excise and custom duties and consumer subsidy, etc. These incentives would end in the new GST regime raising renewable energy costs and pricing and hit investors. The Ministry of New and Renewable Energy (MNRE) has already worked out a possible scenario of these impacts. Various exemptions are provided currently to capital goods and inputs used in renewable energy projects. The foundation of GST is based on pruning of exemptions as far as possible. Hence, if exemptions are pruned for goods used in renewable energy projects, there would be a significant increase in tax cost on procurements. Since all such taxes are (and would continue to be) non-creditable for renewable energy players, the same would be a cost and hence, increase cost of renewable energy. Currently, different tax rates are applicable depending on the nature of procurement. GST aims to provide a single rate for goods and services. The Select Committee has recommended that the standard GST rate should not exceed 20%. A GST rate of 20% would also be substantially higher than the rates currently applicable on procurement of goods and services in the renewable energy sector. This would have an adverse impact as the taxes paid on procurements would increase the tax cost burden for the renewable energy sector. In case of inter-State purchases, a concessional rate of CST of 2% is provided against issuance of statutory form (Form C) in case the goods are to be used in generation or distribution of electricity. GST is expected to be levied on all inter-State supplies, with availability of credit in destination States. It is
  42. 42. KUNAL BASU 41 likely that statutory forms (eg Form C) would be done away with under the GST regime. Hence, concessional rate of tax may not be available even if the goods are to be used in generation of distribution of electricity. IGST at 20% would be applicable on inter-State procurements along with an additional tax of 1%. This would lead to a substantial increase in tax costs as compared to the current regime having a direct impact the cost of renewable energy. The GST's effect on cost of setting up of renewable projects would vary across segments, MNRE said in a recent report. The impact includes a 16-20% rise in solar off-grid costs; 12-16% rise in Solar PV Grid installations and a 11-15% jump in the cost of setting up wind energy projects. Biomass projects could see their costs rising by 11-14% while setting up small hydro projects could become costlier by up to 11%46. Non-Renewable Energy Increased cost of energy projects: While goods and services required for setting up energy projects will be subject to GST, they will not be creditable for the generating entity leading to a cascading of indirect taxes. Under the current indirect tax regime, various concessions and exemptions are available for setting up energy projects, especially in the renewable energy space to counter such cascading effect. However, there is no clarity on whether these concessions/ exemptions will continue under the GST regime. Removal of concessional rate for inter-State procurement for EPC contracts: To take advantage of the concessional 2% rate provided for procurements by entities engaged in the generation or distribution of electricity, project owners are 46 Ministry of New and Renewable Energy, Govt. of India: Implications of GST on delivered cost of renewable energy extracted on Jan. 8, 2016 from manager/UserFiles/Implications-of-GST-on-delivered-cost-of-Renewable-Energy.pdf
  43. 43. KUNAL BASU 42 currently able to structure their procurements as inter-State sales to reduce tax costs. This 'in-transit sales' exemption on inter-State sales is also available on second (and subsequent) sales undertaken during the direct movement from a manufacturer to the principal (with title passing through contractors and sub-contractors). However, the Model GST law provides no such concessions or tax planning opportunities. In the absence of such tax exemptions and concessions, there is a possibility of a significant increase in project costs. Power Purchase Agreements (PPAs): These generally provide for pass-through of existing indirect taxes by way of incorporating the costs thereof into the contract price. However, PPAs generally provide for contract prices to be adjusted on account of any increase in taxes or introduction or change in taxes (these are covered as 'Change in Law' or 'Force Majeure' clauses under the PPAs). Generally, introduction of GST would be seen as 'Change in Law' or 'Force Majeure' event under most PPAs. However, for those PPAs that do not provide an adjustment to cover increase or introduction of taxes, the introduction of GST would result in an escalation of contract prices. Further, ambiguity remains in cases where GST is brought into force after the pre-bidding stage of a project but before the signing of the PPA. In such a situation, an issue may arise on whether such change in tax legislation would be considered as a 'Change in Law'. Any tax distortion faced by this sector on account of electricity being outside the ambit of GST, will have a cascading effect on the rest of the economy, negating some of the very benefits sought to be brought about by the introduction of GST. Government may have missed an opportunity by not integrating generation and distribution of electricity with other supplies which interact with it, under the umbrella of GST. Therefore,
  44. 44. KUNAL BASU 43 the viability of the energy sector, under the current GST regime, would depend upon the exemptions and concessionary tax which may be put in place to counter the impact of different tax regimes on the input and output side. Exemptions in renewables will need to be grandfathered for this sub-sector to remain viable47. Electrical & Electronic Equipment The new GST regime is likely to benefit the lighting as well as electrical sector significantly through an overall reduction in tax rates. Under the new tax structure, the overall incidence of effective indirect taxes on the companies in the sector will be lowered to around 18% from the current 29 to 30%48. Oil & Gas With the exclusion of Crude oil, Natural gas and major petroleum products from the ambit of GST for the time being, the Petroleum Industry will take a major hit. This hit will come in the form of stranded taxes as input credit would not be available in the hybrid regime of taxation. Compliance challenge in a dual regime is another issue that could somewhat be offset by “Zero rating” of the excluded goods that is not there in the present GST scheme. The five petroleum products—crude, natural gas, Aviation Turbine Fuel, diesel and petrol—are excluded from the coverage of GST for the initial years while the remaining petroleum products — kerosene, naphtha and Liquefied Petroleum Gas— are covered within the coverage of GST. This may result in non- creditable tax costs which would have an inflationary impact on the overall economy. For instance, a refinery producing diesel 47 Trilegal/Mondaq: GST Impact: Energy Sector extracted on Jan. 8, 2016 from 48 Dynamic Levels: GST’s impact on India’s Energy Sector extracted on Jan. 8, 2016 from
  45. 45. KUNAL BASU 44 and petrol will pay GST on the procurement of plant, machinery and services. However, this tax would not be creditable against the excise duty and VAT which would be levied on petrol and diesel49. These issues assume extraordinary importance since in 2013-14, this sector contributed about Rs.1.07 lakh crore (29.70% of all indirect revenue) and Rs. 1.52 lakh crore (2.30% of all own tax revenue) to the central and state exchequers respectively50. Goods of Mass Consumption A study on the impact of proposed GST structure on goods of mass consumption by the Tax Research Unit of the Dept. of Commercial Taxes of the Govt. of Orissa51 showed the pre- and post-GST price effect in the following table for goods procured from outside the state. This study assumed that there would be three rates under GST, lower rate of 6% and a standard rate of 10% on goods and 8% for services both for Central GST and State GST. Hence combined GST rate would be 12%, 20% and 16%. It was further assumed that the selected commodities would be placed in the lower tax category of 12%. Item Retail Price in (in Rupees) %age (+)/(-) VAT Regime GST Regime Suji/100 kg 1680 1773 5.54 Maida/100 kg 1638 1729 5.56 Atta/100 kg 1769 1866 5.48 Besan/100 kg 3608 3808 5.54 Vanaspati/15 kg 811 857 5.67 Mustard Oil/100 kg 6401 6764 5.67 49 Energy Infrapost: Implications of GST: A Big Negative on Oil & Gas Sector extracted on Jan. 8, 2016 from sector/?print=pdf 50 Sacchidananda Mukherjee: GST in the Petroleum Sector: Revenue Neutrality and States’ Concerns, National Institute of Public Finance and Policy (NIPFP) New Delhi extracted on Jan. 8, 2016, from impact-of-gst, slide 4 51Govt. of Orissa, Commercial Tax Dept.: Study of the impact of proposed GST structure on the prices of Goods of Mass Consumption extracted on Jan. 9, 2016 from
  46. 46. KUNAL BASU 45 Palmolein Oil/100 kg 5231 5528 5.68 Tea/kg 252 267 5.95 Arhar Dal/100 kg 5937 6277 5.73 Moong Dal/100 kg 6149 6500 5.71 Footwear (plastic)/18 pairs 4476 4552 1.70 Footwear (leather)/60 pairs 40402 37942 -6.09 Ready-mades/20 pairs 15426 14665 -4.93 Exercise Book/50 doz 18233 19466 6.76 Paper/metric ton 194307 199218 2.53 Made-up textiles/10 pcs. 7459 7092 -4.92 On the other hand, the same report in surveying some goods procured from within the state arrived at the following tabular findings: Item Retail Price in (in Rupees) %age (+)/(-) VAT Regime GST Regime Black Gram/100 kg 5132 5526 7.68 Moong Dal/100 kg 4152 4471 7.68 Rice/100 kg 2114 2274 7.57 The Report concludes that there will be decrease in price of leather footwear, readymade garments and made up textiles as these are excisable goods. Presently, excise duty and CST are collectable on these goods. Since excise duty and CST is not VATable, the tax paid on these goods gets embedded in the cost price which causes cascading. Under GST regime CST and excise duty shall be subsumed and input tax credit will be available on sale of those commodities. Hence, price of these commodities will decrease. Plastic footwear and paper are also excisable goods. There will be marginal price rise by 1.70% and 2.53% respectively in case of plastic footwear and paper. The other commodities do not attract excise duty. Hence, the price rise in case of the other commodities is found to be about 5.5% to 8%. According to the presentation at the GST Council meeting on Oct. 18, 2016, of the 29 items (part of Consumer Price Index basket) that are proposed to be taxed at 6%, 19 items are set to witness an increase in their tax incidence as currently they
  47. 47. KUNAL BASU 46 attract a lower combined tax rate. Within this group, however, the tax rate on items such as vanaspati, butter, ghee, taxi and auto-rickshaw fare and coffee powder is set to come down from the current combined tax incidence of 7-9% to 6%.On the other hand, in case of CPI basket products that currently fall in tax rates of 25% per cent and above, most items will witness a drop in tax rates. As per the agenda papers which listed 50 items in this category (total CPI weight of 45.86%), while the combined tax incidence for cold beverages (bottled and canned) currently stands at 38%, it may come down to 26% if the Council agrees to the proposal — these may, however, fall in the demerit goods category and attract additional cess. If taxes on cars and jeeps are proposed to come down from 31% to 26%, that on motorcycles and scooters will come down from 28% to 26%. The Centre has, however, proposed to impose additional cess on high-end cars. Other important items that have higher weightage in CPI and are likely to see a decline in prices are washing soap, soda and powder, toilet soap, hair oil, shampoo and hair cream, powder, lotion, perfume, toothpaste, toothbrush (aggregate weight of 2.71% in CPI). Their tax rate will come down from the present combined tax incidence of 29% to 26%. The following table shows changes in some items:
  48. 48. KUNAL BASU 47 In this presentation, the Centre said the total impact of the proposed rate structure on CPI-based inflation rate will be (-) 0.06 per cent. While the inflation impact on constituents of CPI such as health services, fuel and lighting and clothing is estimated to be 0.56 per cent, 0.05 per cent and 0.23 per cent, respectively, that for transport is estimated at (-) 0.65 per cent, education at (-) 0.08 per cent and housing at (-) 0.09 per cent52. Jewellery & Bullion At present, the Centre and States tax precious metals at rates between 1-1.6%. Currently, about 70% of goods and services get taxed at an average rate of 27%. To protect their revenues, States have sought that the standard GST rate, which will fall on the bulk of goods and services, be fixed at 20% or higher53. GST implementation may make household jewellery 18% cheaper, which in turn will discourage sales of used ornaments 52 Indian Express: Chicken to tea: Many mass items to cost more, extracted on Jan. 9, 2016 from everyday-products-3092481/ 53 The Hindu: Gold key to lower GST rate, extracted on Jan. 9, 2016 from rate/article14981885.ece
  49. 49. KUNAL BASU 48 freely to jewellers. Jewellers will not get input credit on gold procured through melting of used jewellery. Hence, they would prefer to pass on the loss to customers. Since, the GST Council is contemplating 18% tax on gold ornaments, jewellers will get 18% lower input credit. Currently jewellers avail input credit from banks as working capital in commensurate with gold collected through melting of scrap jewellery. In case of price rise, quantity of used jewellery increases. Scrap jewellery collection declines with fall in gold prices. On passing 18% lower input credit, customers will get lesser amount equivalent to the tax that may discourage sale of used jewellery. Hence, customers may get 18% lower realisation from their used gold jewellery. Since most jewellery sales take place in distress, jewellers might even take advantage of the situation in the name of GST and lower prices further. Gold recovery through melting of used jewellery stands between 5% and 10% in India, depending upon price volatility54. Branded jewellers fear that if the government fixes GST on gold jewellery at 4-5%, several customers, particularly those in rural areas, may prefer the parallel market to the organised sector, because of a likely price difference of Rs 30-50 per gram55. However, an expert states that comparing with the present indirect tax structure the effective GST rate for precious metals (even assuming the highest rate of 6%) actually is slightly higher than the current indirect tax rate burden. Hence, it is unlikely that the GST rate 54 Business Standard: GST rollout to make household jewellery 18% cheaper, extracted on Jan. 9, 2016 from household-jewellery-18-cheaper-116080400238_1.html 55 Economic Times: Higher GST on gold jewellery may make rural customers prefer parallel market, fear branded jewelers, extracted on Jan. 9, 2016 from jewellery/higher-gst-on-gold-jewellery-may-make-rural-customers-prefer-parallel-market- fear-branded-jewellers/articleshow/53549574.cms
  50. 50. KUNAL BASU 49 proposed on precious metals would actually adversely affect the sector56. Exports For the manufactured product exporters, the most significant impact would be the increased requirement and blockage of working capital. For manufacturing a product, a firm buys locally or imports raw material and machinery. The current export schemes allow firms to buy these without payment of applicable duties through ab-initio exemption or subsequent refund of duties. The proposed GST system mandates that all duties must be paid at the time of a transaction while refund for these can be obtained after exports. This means the exporter will have to arrange money for the inputs, manufacturing and payment of duties and taxes. SEZs, EOUs, deemed exports: Currently, the SEZ developer and units can import their requirements duty-free. Also, the supplies made by the domestic units to SEZs are considered exports and hence are free from payment of taxes and duties. However, the model GST law defines exports as taking goods and services out of India to a place outside India. India is defined to include the Exclusive Economic Zones lying at 200 nautical miles beyond territorial waters. Since SEZs are located on Indian Territory these would be reduced to the status of a normal domestic firm. This means, no duty or tax exemptions on imports or exports would be admissible. Imports into SEZ will attract IGST while supplies to SEZs will attract CSGT and SGST or IGST. With average value addition at SEZ already less than 10%, the new law may make many SEZs unviable. 56 Financial Express: Will higher rates under GST regime affect precious metals like gold, silver?, extracted on Jan. 9, 2016 from rates-under-gst-regime-not-to-impact-precious-metals-services-experts/177225/
  51. 51. KUNAL BASU 50 GST will also affect the supplies defined as deemed exports. Currently, the supplies to projects under International Competitive biddings (ICB), mega power plants and World Bank funded projects are exempted from central taxes. This has been done to enhance competitiveness of Indian firms participating in global tenders or large scale bids. Post-GST, these supplies, currently termed as deemed exports, will become taxable where no refund would be available. The provision of no exemption and only refund will lead to blockage of about Rs. 185500 crore annually for the manufactured goods exporters. This figure considers export value of $200 billion, an average 30% value addition over the inputs and cost of capital at 12 per cent. Capital at 12% in India is way too high compared to 0-1% in most developed countries. Moreover, most SMEs cannot get capital even at 12% interest. The more sophisticated a product, higher is the need for external sourcing of inputs, leading to higher requirement and blockage of working capital. A domain expert has proposed an unconventional solution to a vexatious problem. The working capital blockage issue can be resolved without compromising the integrity of the GST model. Firms may be permitted to pay tax on transactions leading to exports through e-currency. This would be of the nature of an IOU where a firm would agree to set off its IOUs with the actual payment within a year or at the time of the completion of exports, whichever is earlier. A firm can be allowed to use IOUs equal to the value past year’s export performance. This solution keeps the current GST framework of making payment first, refund later, intact57. 57 Srivastava, Ajay: Exporters need to prepare for GST, extracted on Jan. 9, 2016 from
  52. 52. KUNAL BASU 51 However, some exporters of capital goods, like Thermax, state that GST will reduce tax outgo. Currently, capital goods industry pays 24-25% for goods sold in same state as manufactured whereas the industry also pays central sales tax (CST) for goods sold in another state58. Manufacturing Industry State incentives: Companies have set up units with significant investment outlays based on incentives offered by States under their respective investment promotion policies. These incentives are usually in the form of tariff incentives (lower tax rates, refund/deferment of taxes etc.) and non-tariff incentives (economical land lease terms, lower electricity duty etc.). At present, States have the flexibility to offer such incentives. However, under the GST regime, such flexibility given to the States is likely to be curtailed to achieve the intended effect of uniformity. Further, the Model GST Law does not clarify the fate of current incentives. Companies which have based their financial projections around these fiscal incentives may have to reassess their projections. The implementation of GST will also signal a move away from the producer State tax system to a consumption State tax system. Producer States will have a lower financial incentive to offer such concessions, as GST will only be credited to the State where the supplies are consumed, as opposed to the present situation where the Producer State is credited with central sales tax on inter-state sales. This would lead to a loss of revenue for the producer States and therefore such States may not be in a financial position to continue offering such incentives, even though there may be other compelling reasons such as 58 Moneycontrol: GST will help exports for capital goods industry: Thermax, extracted on Jan. 9, 2016 from goods-industry-thermax_7200701.html
  53. 53. KUNAL BASU 52 generation of labour, improvement of infrastructure, market creation etc. However, it is likely that future incentives may only be non-tariff based. Area based incentives: Manufacturing units enjoy exemption of taxes based on their location in specified backward areas, capital investment etc. There is no clarity under the Model GST Law on the treatment of such area based exemptions. MRP valuation: Currently, various pre-packaged products for retail consumption are subject to excise duty not on the ex- factory transaction value but on a specified percentage of the maximum retail price (MRP) printed on the package. The MRP based value (which is usually between 30%-35% of the MRP) is in most cases, much higher than the ex-factory transaction value leading to a higher excise duty liability than would otherwise be the case. This increased excise duty itself, results in a higher MRP, ultimately leading to a higher cost burden for the consumers. Under the GST regime, GST is payable by the manufacturer at the transaction value, and is creditable for all subsequent resellers up to the final consumer. Accordingly, the unnecessary tax burden of the MRP regime will no longer be relevant. Working Capital: The impact on working capital may be significant for the manufacturing sector. Under the current regime, stock transfers are not subject to tax. However, under the GST regime, stock transfers are deemed to be supplies and are subject to GST. Though GST paid at this stage would be available as credit, realization of this GST would only occur when the final supply is concluded. This would likely result in cash flow blockages and therefore companies would have to rethink their supply chain management strategies to minimize this impact on their cash flows.
  54. 54. KUNAL BASU 53 Reduction of Cascading Taxes: Under the present indirect tax regime, the manufacturing sector is able to set-off most input taxes levied in the production value chain. However, Central taxes cannot be set-off against State taxes and vice versa. This often leads to a situation where manufacturers are unable to set off excess credit of central or state levies. Further, central sales tax paid on inter-state procurements is also not creditable and are costs for the company. Another issue faced currently is the cascading of taxes at the post manufacturing stage. Dealers, retailers etc. are subject to taxes on their input side which are not creditable (service tax on input services, excise duty on capital goods). This leads to an increase in the cost of goods, ultimately affecting the competitiveness of Indian manufactured goods vis-à-vis imports. All of the above issues are addressed under the Model GST Law, which permits tax set offs across the production value-chain, both for goods and services. This will result in a reduction of the cascading effect of taxes and bring down the overall cost of production of goods. Reduction of classification disputes: Currently, due to varying rates of excise duty and VAT on different products, as well as several exemptions provided under excise and VAT legislations, classification disputes are a regular cause for litigation under both central excise and VAT, especially for the manufacturing sector. It is expected that the inception of GST which is based on the principles of a simplified rate structure and minimization of exemptions will significantly reduce disputes regarding classification of products. Supply chain restructuring based on economic factors: Current supply and distribution models are structured to
  55. 55. KUNAL BASU 54 optimize indirect tax impact arising at various levels of value addition. Transition to GST should hopefully result in such decisions being taken to optimize business efficiency (as opposed to indirect tax efficiency). For instance, currently warehousing choices are often based on arbitrage between VAT rates in different States/ between applicable VAT and CST rates. With the advent of GST, it is hoped that such warehousing and logistics decision would be based on economic efficiency such as costs and locational advantages vis-a-vis key customers. However, a key hindrance could be the proposal to levy a 1% origin tax on inter-state supplies. The manufacturing sector stands to benefit significantly with the introduction of GST. The overall reduction of cascading effect of taxes, especially on the post-manufacture stage of the supply chain should have a positive effect on the cost of manufactured products in the hands of consumers. However, concerns remain on specific issues such as the additional 1% origin tax, increased cash flow issues on account of GST payable on stock transfers, and increased costs owing to exclusion of petroleum fuels from the ambit of GST59. Engineering, Capital Goods & Power Equipment Introduction of GST is expected to improve the prospects of engineering, capital goods and power equipment (ECPE) sector by simplifying the tax structure. The complexity in this sector is that companies are involved simultaneously in manufacturing of goods and rendering of services. For example a company engaged in manufacturing of transmission towers also does EPC of entire transmission lines which not only involve manufacturing of transmission towers but supply of bought out 59 Mondaq-Trilegal: India: GST Impact: Manufacturing Sector, extracted on Jan. 9, 2016 from g+Sector
  56. 56. KUNAL BASU 55 items and rending of services. The EPC players pay service tax at present while the manufacturers pay excise duty. However, in general, a comprehensive tax like GST which would combine the state and central taxes in a single structure and where tax credit would be available at each stage of production and final sale so that double taxation is avoided. This would bring in more cost competitiveness to the domestic players. In this sector indirect tax range is much wider as compared to the other sectors where the product ranges is limited. Hence, depending upon the products manufactured by the company and services rendered, basket of goods provided in the EPC contract, it goes up to around 30% and any GST below this could improve the cost competitiveness of players in this sector. Roads & Highways There are no major implications of GST on toll and annuity based road projects. Further, road construction sector is currently exempt from the preview of excise and service tax. However, EPC contractors are currently paying indirect taxes (mainly on key inputs and service tax to be paid to transporters) at average rate of 9-11% net of credit availed. This is expected to continue under GST. However, processes are expected to be streamlined with implementation of single point tax system which can result in lower cost for the compliance. Moreover, extent of liberalization in credit available under GST against various input used for the civil construction is crucial for EPC contractors60. 60 CARE Ratings: GST Impact on various sectors, extracted on Jan. 9, 2016 from ST%20on%20select%20industries.pdf, p. 3