By Priya Kumari
As a milestone development in the process of rolling out GST, the Rajya Sabha has passed 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.
A cross-sectoral analysis
The impact of GST on businesses varies considerably from sector to sector. For the FMCG sector, it is estimated that the current indirect tax amounts to nearly 27%. This would be brought down under the GST regime as per the proposed 18% tax slab while aerated drinks and tobacco products are likely to bear the heat of an additional cess. Manufacturing units of many companies are based in excise free zones like Himachal Pradesh. It remains to be seen what decision is taken regarding treatment of such zones. FMCG firms are centered on stock transfer model which comprises state wise warehousing units. It saves the central sales tax cost applicable on interstate sale of goods that is not available as a credit. Such stock transfers will attract Integrated GST under the new regime. Despite being available as a credit for consignee location, IGST will create stress on the working capital cycle of firms. So, companies will need to rework their distribution chain to optimise the taxes paid.
For the real estate sector, the GST is expected to remove the overlap between VAT and service tax on certain contracts. The GST paid on raw materials like steel, cement, etc will be liable for credit benefit, thereby reducing construction cost. It also aims to address the multiple tax structures being followed by different states and propose a uniform solution for the same.
The e-commerce sector will be considerably benefitted by the GST since it will reduce the cascading effect of taxes in the value chain and thus ease the prices for the end customer. The concept of tax collection at source has been introduced for e-commerce transactions. The e-commerce operator is obliged to collect the tax amount from suppliers and deposit it with the authorities. This amount can be later adjusted by the supplier against his tax liability to the authorities. Consequently, it calls for such suppliers to register with the tax authorities regardless of any threshold restriction.
In the automobile sector, the GST could help eliminate the hefty VAT and excise charges that are paid on vehicles sold. However, luxury cars will be adversely impacted since they will be subjected to higher tax rates and/or additional cess. In the GST regime, a service provider covering multiple states will need to be registered separately in each state as opposed to a single central registration that is mandated currently.
Another key player in the GST implementation will be the services sector. While currently enjoying an indirect tax rate of 15%, it is likely to see an upwards tax rate when GST gets implemented. And since services comprise a minor proportion of the CPI basket, its impact will not be highlighted in the inflation figures. Similarly, the tax rate on insurance services and solutions is likely to increase from the current level of 15% which will make the insurance products expensive.
The financial services industry is one segment expected to become more expensive and cumbersome in the GST regime. Speculations of increase in tax rates to 18% from current 15% together with increasing burden of compliance due to IGST being divided into CGST and SGST will adversely impact the sector. Presently, financial services are subjected to service tax arising from fee-based activities only. GST must make provisions for clearly segregating the revenue from income-based and fund-based activities like interest, collateralised loans, investment, etc to prevent disruption in the segment. Origin of the supplied service is a crucial element of GST determination. However, financial services are known for their omnipresence in various states and mediums. To comply with GST norms, a bank that has a presence in selected states will require registration in all the states.
As the nation prepares for the implementation of the GST Bill, several nuances of the process are still intriguing elements associated with various stages of the value chain. One key feature under the proposed reforms relates to products sold under exchange schemes. According to the policy, the listed price, instead of discounted price (due to an exchange of goods ) will be considered as a base for calculation of tax on the new item being sold. It is believed that exchange schemes comprise nearly 20 percent of the products sold in the consumer electronics and home appliances segment in India. The issue assumes paramount importance because consumer durables are likely to fall in the higher realms of the proposed four-tier tax structure of 5%, 12%, 18% and 28%. What still remains to be seen is whether the seller will bear the tax burden or pass it on to consumers in the form of price increase.
While the GST scheme of tax reforms is based on the central tenet of uniformity in taxes across the nation, what remains a black box is its overall impact considering the fundamental inequality of states. A handful of the most developed Indian states are responsible for most of the wealth creation, this leads to inter-state divide burgeoning considerably. The initial phase of GST implementation may lead to loss of revenue of states which will subject the balance sheet of poorer states to a stressed scenario. Therefore, categorisation of goods and services in the appropriate tax slabs remains a cornerstone for the success of GST.
Featured Image Credits: DNA India