Introduction to GST
Today taxes constitute a substantial part of the total product or service cost. There are a plethora of indirect taxes at the central and state levy on the consumption of goods and services within India. “Goods and Services Tax” would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments. Excise and duty tax are two biggest indirect taxes at the Central level that will be replaced by the GST.
Implementation of GST
The Goods and Services Tax Bill or GST Bill, proposes a national Value added Tax to be implemented in India from 1 April 2017. The GST shall have two components: one levied by the Center (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State)
There will be many changes in the Indian economy after GST. The tax rate under GST may be nominal or zero rated for the time being. It has been proposed to insulate the revenues of the States from the impact of GST, with the expectation that in due course, GST will be levied on petroleum and petroleum products. The central government has assured states of compensation for any revenue losses incurred by them from the date of introduction of GST for a period of five years.
Impact of GST
The GST will impact the various sectors of our economy in a positive way. In automobiles, a Largely positive demand, as it will lead to a 10-17 per cent fall in prices assuming an 18 per cent GST rate. GST will also be positive for household and personal care space, as the effective tax rate reduces by 200-500 basis points (bps), apart from reducing warehousing and logistical requirements. However, passage of GST will lead to elimination of central sales tax and inter-state value-added tax arbitrage possibilities. This will lead to consolidation of warehouses and increased efficiencies in the logistics chain. Consumer durables will benefit from improved logistics too. Clarity on works contract taxation is the key benefit for infrastructure sector. This could reduce litigation, as it eliminates the difference between sales and services. Overall tax incidence on the cement sector could decline. The sector will also benefit from expected decline in logistic costs.
There is also a negative impact of GST in a lot of sectors. GST will be negative for wind, turbine generator manufactures like Suzlon and Inox Wind, as pressure on developer margins and internal rates of return could eventually force reduction in prices. Exclusion of “sale of electricity” from GST could potentially raise the cost of coal-fired and renewable energy for Discoms. Profitability of independent power producers selling via medium/long-term PPAs is unlikely to be dented as cost escalation would likely be passed on. GST rollout could be negative for the pharmaceuticals sector, as it is likely to increase indirect tax. Analysts say indirect taxes paid for the pharmaceuticals sector, as it is likely to increase indirect tax. Analysts say indirect taxes paid by pharma companies could increase by 60 per cent and MRP by four per cent.
The GST bill seems to be in the last stages of clearing the Rajya Sabah hurdle. Most analysts suggest that from a macro-economic perspective, while the short-term impact of GST could be mixed, the long-term impact will be positive.
Besides simplifying the indirect tax structure, GST should also help to create ‘One India’ by eliminating geographical fragmentation. It will remove the current cascading of taxes by ensuring the seamless flow of input credit across the value chain of both goods and services.