The game changing Goods and Services Tax (GST), which will be a national sales tax that will be levied on consumption of goods or use of services, will be rolled out from July 1. Due to GST, the whole of India will be one big homotenous market with uniform taxes across the whole country, which will in turn replace 16 current levies - seven central taxes like excise duty and service tax and nine state taxes like VAT and entertainment tax.
With the GST, India will join select League of Nations with a goods and service tax. France was the first country to implement the GST in 1954 and since then, Germany, Italy, the UK, South Korea, Japan, Canada and Australia have been among the over a dozen nations which have implemented the GST. China implemented GST in 1994 while Russia did it in 1991. Saudi Arabia plans to do it in 2018.
GST has moved a step closer to reality with clarity on tax rates for most goods and services. Addressing the concerns raised by industry participants and associations, the GST Council has managed to minimise the transitional impact on most sectors and has made an attempt to keep the GST on sensitive food items in the range of 0-5% and transport at 5%. The GST Council last week finalised tax rates of around 80-90% of goods and services under the four-slab structure of 5, 12, 18 and 28% to apply on services including telecom, insurance, hotels and restaurants. While education and healthcare have been exempted from GST, telecom and financial services will be taxed at a standard rate of 18% and transport services will be taxed at 5%.
Entertainment tax will be merged with service tax under GST and a composite 28% levy charged on cinema services as well as gambling or betting at race course. Hotels and lodges charging per day tariff of Rs 1,000 will be exempt from GST. Rate for hotels with tariff of Rs 1,000 to 2,000 per day would be 12% while those with tariff of Rs 2,500 to Rs 5,000 would be 18%. GST for hotels with tariff above Rs 5,000 will be 28%. For most manufacturing goods, the finalised GST rates are largely in line with the pre-GST effective tax incidences, so the taxation impact is largely neutral. However, there are still some items like bidis and gold for which GST rates will be finalized in the next meet of the GST Council in June.
“GST Council has finalized the rates for nearly 500 services under 4 categories. Importantly, in the goods category various commodities, including daily consumer items and essential commodities have been exempted from GST. 5% GST on coal will make electricity more affordable for the poor, farmers and small units. Healthcare and education services have been kept outside the ambit of GST. These measures will definitely provide some relief to the common man. However, taxing essential medicines, cellular and banking and insurance services at a higher rate will definitely affect common man as all these are essential services and not luxury,” said Vijay Kalantri, Vice Chairman, World Trade Centre (WTC) Mumbai.
WTC Mumbai feels that the companies need to take immediate steps as far as the compliance system and implementation is concerned. With GST rationalizing/reducing cascading effect of tax, companies will have major task ahead to decide on the prices to be charged from July 1, 2017. This is unlikely to be a simple exercise and would necessitate companies to understand changes in the cost structure dependent upon multiple factors such as reduction of prices by vendors, availability of additional credits, increase in procurement rates, increase in working capital requirement, etc. The companies would therefore need realignment of business planning and the short available time would make it challenging to conduct this exercise. The Government therefore needs to encourage and persuade companies to be GST compliant at the earliest, he added.
The hotel industry however is disappointed with GST and terms it complex, high and uncompetitive. “The Government should realise that while neighbouring countries like Myanmar, Thailand, Singapore, Indonesia and others levy taxes ranging from 5 to 10%, we cannot afford to have these kind of complex and high GST. This is simply not viable. Tourists will simply skip India,” says Dilip Datwani, President, Hotel and Restaurant Association of Western India (HRAWI). Being the backbone of the tourism industry, the industry was expecting to be placed in the 5% slab.
Rating agency Crisil Research, in its report says, “In sectors such as consumer durables, construction material and fast moving consumer goods (FMCG), the GST rates will be marginally different. However, for players having higher incidence of CST at present, the saving under the new tax regime will be to the tune of 2%. For segments under FMCG, the effective tax saving will differ across states due to a wide variation in value added tax (VAT) rates. The tax saving will be relatively higher in automobiles sector, specifically sports utility vehicles (SUVs), as the tax incidence will reduce from the current effective tax rate of 55.3% to 43% (28% GST + 15% cess). For all other segments of automobiles, tax incidence is marginally better compared with the previous effective rates.
Crisil Research believes that, though the four tax rates for services has surprised industry participants, the finalised GST rates on many services were close to current effective incidences taking into account the pre GST abatements. Accordingly, services such as airlines (economy class travel), air-conditioned railway travel and restaurant services will have only marginal benefits. For instance, the air travel for passengers on an economy class, factoring 60% abatement, had an effective tax rate of 6%, which would be 5% post GST. As far as entertainment tax is concerned, though the finalised GST rate of 28% is lower than the pre-GST tax of more than 30% (tax varies widely across states), exclusion of entertainment tax imposed by local bodies under GST remains a worry for industry participants.
"GST is a game changing reform that is widely awaited. It has the potential of adding almost 100bps to the GDP growth. Though the near term will see some challenges of implementation, It is one reform that will bring efficiency in the economy and widen the tax base," said Sunil Singhania, CIO - Equity Investment, Reliance Mutual Fund.
“With GST implementation inching closer, the economy too is eyeing vast opportunities and targeting sharp growth. Being more efficient, the system will bring much ease to the tax structure and lower evasions massively. However, retailers are still in a dilemma around GST which we must address together and create awareness so that it can be welcomed smoothly without any ambiguities,” said Anirudh Dhoot, Director, Videocon.
The Society of Indian Automobile Manufacturers (SIAM) has welcomed the new GST Rates on automobiles. “The rates are as per the expectations of the industry and almost all segments of the industry have benefitted by way of a reduced overall tax burden in varying degree. This will pave the way for stimulating demand and strengthening the automotive market in the country, paving the way for meeting the vision laid down in the Automotive Mission Plan 2016-26”, said Vinod Dasari, President, SIAM. The Government has done well to ensure stability in taxation while at the same time moderating the taxes wherever they were too high, he added.
GST to cut inflation by 2%, create buoyancy in economy: Adhia
Inflation will fall by 2% on implementation of the goods and services tax (GST) and will create buoyancy in the economy, Revenue Secretary Hasmukh Adhia has said. With the stage set for the biggest overhaul of Indias tax system since Independence, the government will launch a massive awareness campaign to educate consumers about GST so that they are not fleeced by traders in the name of new tax. In an interview to PTI, he said the all-powerful GST Council will meet next week to decide on tax rates of contentious items like gold, bidi and biscuits, just in time for its rollout from July 1. The rates, he said, have been so fixed that incidence of taxation has come down in many and remained at the same level as now in most of the remaining goods and services.
"I dont think inflation will at all go up because of GST. We have taken special care to ensure inflation does not go up. Our internal estimate is that after the rates are decided, inflation should come down by 2%," he said.
While the current indirect tax regime suffers from significant cascading, which leads to higher cost of goods and services, a free flow of credits across transactions under the GST framework will bring down the tax cost for businesses. Also, taxpayers or consumers currently have to pay both the Centre and state taxes on a single sale, which adds to increased costs for businesses and consumers. Such an increase in costs adds to the inflationary pressure.
GST will be a single nation-wide sales tax replacing a string of central and state levies. "That is how we have managed to keep our inflation basket under control," Adhia said, promising to fix any compliance issues that crop up during implementation.
The revenue secretary said GST will create buoyancy in the economy through better compliance and ease of doing business. "I wouldnt say anything is pending, but I would say the government has to reach out to the trade and industry and also the machinery of explaining the GST procedures in townhall meetings. We need to accelerate this," he said on the task ahead.
GST to be ‘biggest achievement’ of Modi govt: Assocham
The Goods and Services Tax (GST) will feature on the top of the government's list of achievements in the last three years that also saw some other credible measures on taxation and financial inclusion fronts, according to an Assocham report.
As the Narendra Modi-led NDA government completes three years in office, the chamber drew a charter of measures on the economic front undertaken by the Centre. The industry body perceives financial inclusion, digitisation and public investment on infrastructure like railways and power distribution among the many credible steps for structural changes in the economy.
The GST is being billed as India's biggest tax overhaul since independence, as it is likely to improve ease of doing business by simplifying the tax structure and compliance. The indirect tax reform is slated for implementation from July 1. Based on the feedback received from its members, Assocham noted that benign inflation both at the retail and wholesale levels is among the other positives for the government.
As the inflation remained within the target of 4% set by the RBI, the central bank has also been able to keep the interest rates low, although credit off-take in the private sector still remains a challenge, it said. "The implementation of Goods and Services Tax (GST) in the next few weeks would cap other major initiatives of the government. The focus on improving ease of doing business through measures like GST and other taxation reforms has also been noted as one of the major achievements of the NDA government," Assocham President Sandeep Jajodia said.