By Priya Kumari
The Goods and Services Tax (GST) is a landmark amendment in the indirect tax regime in India that attempts to kill multiple birds with one stone. Designed to avoid the cascading of taxes, it implements a smoother tax structure in order to encourage better tax compliance. The fundamental tenet of GST is destination-based taxation that aims to subsume numerous existing indirect taxes like the excise duty, service tax, countervailing duty, etc. at the Central level and Value Added Tax (VAT), Octroi tax, Purchase tax, etc. at the state level. Barring certain goods like alcohol for human consumption, a majority of other goods and services are brought under the GST net.
The proposal is to introduce dual levy by State/ Union Territory and the Centre. IGST is to be applied on interstate transactions of goods and services. One of the most significant developments in the GST roadmap is that the Rajya Sabha has passed the four supplementary legislations without amendments. The four Bills include the Central GST Bill, the GST (Compensation to States) Bill, the Integrated GST Bill and the Union Territories GST Bill.
GST Council is the supervisory body entrusted with the implementation and support of GST tax regime. With the proposed implementation from 1st July 2017, the GST Council is yet to allocate tax rates to product classes. Tax slabs of 5%, 12%, 18% and 28% have been proposed to be applied on various goods and services and it is likely that the rates will be consistent for individual product groups to avoid complexity in the structure. Setting its foot in as a major indirect tax reform, the GST structure is bound to have varying impacts on ways of doing business in different industries.
Food Manufacturing and Consumer Goods
The FMCG sector is likely to reap huge benefits out of the GST implementation. Currently, an average indirect tax rate on these products is around 26% to 28% inclusive of central excise duty and state levied VAT. However, they are likely to fall into the 18% slab under GST. Benefits in tax savings can be passed on to consumers to stimulate demand. Certain FMCG companies having manufacturing units located in Excise free zones currently enjoy tax exemptions. It remains to be seen as to how they are treated in the GST regime. One adverse impact of GST on this sector will be stressed working capital cycle. The companies which have product movement between warehouses located in different states will have to pay IGST, although it is available as an input tax credit.
Automobile Industry
When it comes to the automobile industry, it has its own complications arising from outsourced component making processes, longer investment cycle, VAT vs Service tax challenges, warranties, etc. Currently, the indirect taxes include Service tax (ST) on services both as provider and also as receiver under reverse/ joint charge; Value added tax (VAT)/Central sales tax (CST) on Sale of vehicles and components. Multiple such taxes will be subsumed into CGST, SGST and IGST as applicable, which would then be available for input tax credit. This will lead to a reduction in procurement cost of vehicles. However, vehicle transfers between two states or between separate dealerships of a dealer will incur IGST which will increase the working capital requirements. Currently, VAT is not payable on the advance payment made for advance booking of vehicles. However, GST regime requires payment of the applicable taxes on advanced booking as well.
In the auto sector, dealers receive income from sources like commission, reimbursement, warranty receipts from manufacturers, a commission from bankers and insurers. Taxes on such incomes are paid by the dealers preferably on a receipt basis because the details keep changing in the intermediate stages. Such liberty will not be there in the GST regime as everything is system driven. This will encourage the dealers to get their linkages with vendors and manufacturers corrected to avoid facing the brunt of taxes. Presently road tax element is not subjected to taxation under the service tax or VAT. But, no such exemptions will be granted under the GST regime.
Dealers receive discounts from manufacturers based on targets. Such post supply discounts will not be eligible for deduction from the value to be taxed if they are not linked to any invoice. Dealers need to register separately for different states where they do business. On the positive side, many disputes like whether handling charges are liable for VAT or service tax, complexity in the bifurcation of the labour and material in the servicing of the vehicle and much more will be done away with in the GST regime.
E-Commerce Sector
The E-commerce companies are set to some fundamental changes in the tax regime pertaining to them. Tax collected at source (TCS) at 2% has to be levied by the operator as total amount payable to suppliers of goods/services. This tax will be deposited with the authorities and would be adjusted as a part of suppliers output tax liability. The GST Bill gives power to the tax operators to seek information from the e-commerce operators about the sales made by them. Currently, different sellers in different states experience different tax rates. So, online marketplaces list sellers which have lower tax rates, thus being able to provide products at prices lesser than the local retail sellers. With uniform tax rates within product groups, GST aims to bring online and offline sellers on a level playing field. In offline conditions, GST registration is mandatory only when the seller has a turnover of Rs 20Lakh or more. However, in the GST net, a trader must necessarily register in case of online transactions, irrespective of the turnover.
Banking and Financial Services
Banks and financial services will face challenges due to the place of supply rules. The customers have mobility across environments and geographies. Therefore, banks having a presence only in selected states will require registering separately for all the states and union territories. Currently, these are being taxed at 15%. The GST rate is expected to be on the higher side at 18%. As of now, service tax is imposed only on fee-based activities. Clear demarcation is required in the GST structure to prohibit the taxation of fund based activities along with the fee-based ones. A finance lease transaction includes a leasing company (lessor) buying an asset and renting it to the user (lessee) for an agreed price and time period. It is generally treated like a loan because the risks and rewards associated with the asset are transferred to the lessee and the asset is transferred on the balance sheet.
An operating lease is a transaction in which all risks and rewards associated with the asset remain with the lessor. It is generally treated like renting, thus lease payments being captured under operating expenses and the asset does not appear on the balance sheet. In the present tax structure, finance lease transactions include both VAT and service tax but the import of assets on lease basis doesnt attract VAT. In the GST network, finance lease will be treated as a supply of goods and an operating lease will be treated as a service, thus both being subjected to GST.
The impact of GST on the real estate sector is dependent on the tax slab it is subjected to. Properties in the residential segment will be unaffected as they do not attract service tax. Leasing of properties will be affected depending on the tax rate applied. Developers will receive lower construction costs due to the elimination of double taxation at various points and expect a reduction of taxes on inputs like cement and steel.
For all businesses alike, GST will create additional requirements for technological improvements in Enterprise Resource Planning and staff training to create familiarity with the compliance requirements. It is also likely to impact the logistics and supply chain of certain firms which operate warehouses across different states. The accounting and reporting standards would also need to be modified to comply with the tax credits and payments.
This article was sponsored by TomorrowMakers.