With the Rajya Sabha (Upper House) and the Lok Sabha (Lower House) unanimously passing the 122nd Constitution Amendment Bill (the ‘Bill’), it appears that one of India’s most significant tax reforms since independence – Goods and Service Tax (“GST’), is finally on its way to reality. After being approved by the Upper House of the Parliament unanimously with 203 votes, the amended Bill was also approved by the Lok Sabha with a whopping 443 votes.
After a 13 year long hiatus since the tax was first mooted, the Bill has finally been passed in both the houses, with the democracy hailing the achievement as a great measure towards tax transformation and transparency. This milestone is expected to harmonise a mosaic of State and Central levies into a unified tax, creating a single seamless nationwide market, reducing business transaction costs, and catalysing the overall long term economic growth of the country.
While both the houses has given their nod, the next step involves at least 50 percent of the States providing their ratification on the Bill. It is expected that at least half the States would ratify the Bill within the next 30 days, as the Central Government seeks to put its best foot forward to roll out the new tax system by April 1, 2017.
Support from States
In this regard, the Honourable Union Finance Minister – Mr Arun Jaitley has expressed that virtually all the States (except Tamil Nadu) have presently provided their in-principle support to the idea of GST in its present form. While Tamil Nadu has expressed concerns about revenue loss and has expressed need for a separate dispute-resolution body on GST, other States have opposed the same basis the view that concerns of revenue loss are applicable to them as well and that the GST Council proposed to be set up would handle dispute resolution.
Key producing States such as Tamil Nadu, Punjab, Maharashtra and West Bengal have estimated revenue losses of about 4,000 to 5,000 Crores each. As a result, compensation to the States for such revenue loss is critical to seek support of the States; however, such compensation can only be fixed after the tax rate is finalised.
Several states have advocated for a standard GST rate of about 22-24% to minimise revenue losses. This suggestion is way ahead of the 17-19% proposed by the Chief Economic Advisor Arvind Subramanian. Also, while the Centre and some of the States have vouched for a GST threshold of INR 25 Lakhs, certain States have been insisting on a threshold of INR 10 Lakhs to minimize revenue losses.
n spite of the above inconsistencies, States have been gearing up to become GST ready by April 2017, the proposed deadline for roll-out of the much awaited tax reform. The Kerala State Government is gearing up to usher in GST through modernisation of the Commercial Taxes Department and imparting training to officials. Honourable Finance Minister – Mr TM Thomas Isaac said that the Taxes Department needed to be duly equipped for introducing GST, and has proposed to give intensive training for department personnel.
Further, in their 2016-17 Budgets, key BJP ruled states such as Gujarat, Maharashtra and Rajasthan as well as non-BJP ruled states like Bihar and Himachal Pradesh proposed amnesty schemes for cases related to value added tax, central sales tax and sales tax. Most of these amnesty schemes revolve around waiver of interest and penalty on payment of tax. West Bengal had also come out with an amnesty scheme for unregistered dealers to widen its tax base. The rationale behind introduction of such amnesty schemes is to reduce the backlog of pending cases before implementation of GST.
Setting up of a robust IT infrastructure has been touted as one of the greatest challenges to be faced by the States, while implementing GST. In this regard, many States have made significant headway in putting in place the IT infrastructure for the expected transition to the GST regime. In Gujarat, the tax department has started cleaning up data related to PAN card holding dealers. Validated PAN would be required when States move to the GST network. Gujarat has validated around 489,000 PAN holders till date, say tax officials.
Maharashtra has currently initiated a training programme for training 100 master trainers in the State. These trainers are expected to further train about 5,000 officers and inspectors of the State sales tax department. Also, State tax officials have already vetted PAN card details of the 800,000 odd dealers located in the State.
As per a senior official in West Bengal State’s IT department, West Bengal has been working on integrating its IT software with the Goods and Services Tax Network (GSTN), the IT backbone connecting all State Governments, businesses, banks and other stakeholders on a real-time basis.
Among southern states, Tamil Nadu and Karnataka already boast of a fairly robust IT-based tax infrastructure system. Once the GSTN software is ready, the States are expected to intensify efforts on training.
Industry peek – Key sectors
While the Centre and the States are on course aiding transition into the much awaited tax reform, the industry has also been upbeat on building a transparent tax administration. Growth of any business is good news for the economy and especially the taxman. GST is expected to increase the tax revenues through growing businesses across sectors and to support the businesses with a clarity on taxation matters and ease of doing business.
Speaking of sectors, it is touted that the manufacturing sector, which has currently been plagued by a complex tax structure, inadequate infrastructure and bureaucracy, would gain the most. The new GST regime is expected to trigger a transformational shift from a complex multi-layered indirect taxation system to a unified indirect one. Some of the key gains expected in the sector are as follows:
- Opportunity to re-structure the supply chain as per commercial factors
- Reduced costs of production, on account of higher creditability of taxes
- Hassle free supply of goods, on account of reduction of stoppage time at check posts
- Long term estimated increase in higher outputs, increase in employment and economic boom
- Elimination of compliance requirements in relation to forms for stock transfers, branch transfers, inter-state supplies
Other key sectors that are expected to gain from GST are as follows:
It is expected that companies in the FMCG sector could generate substantial savings in logistics and distribution costs, given that the need for reduction in warehouses and multiple sales depots. Currently, it is estimated that FMCG companies pay indirect taxes approximating to almost 24-25% including excise duty, VAT and entry tax. Given a GST of about 18%, this could yield significant reduction in taxes.
However, in case the recommended 40% “sin/ demerit” rate of GST is made applicable for products such as aerated beverages and tobacco products, the prices of such products may increase substantially.
Real Estate Sector
GST is expected to be a huge game-changer for the real estate sector. This is primarily on account of the fact that presently, there is an overlap of VAT and service tax on a certain portion of works contracts ranging from 120 – 145% depending on the kind of contract and consequent disputes around this with both the Central and State authorities; this is expected to be addressed under GST. Also, while the excise duty paid on procurements like steel, cement and other materials used in construction becomes a cost in the system presently, GST paid on these materials should be available as credit, thereby reducing cost of construction. Further, CST, entry tax, octroi being subsumed into GST, the same will not be a cost anymore in the hands of the contractor. Hence, the contract prices should come down, which in turn should benefit the developers and more importantly buyers of real estate, ie, the common man.
Also, the issue of different tax structures being followed by developers across States or within the same State, should be addressed under the GST regime, with the proposed uniform tax structure. This should ideally benefit the sector as a whole, reducing tax costs and complications.
It is expected that GST would help create a single unified market across India allowing seamless movement and supply of goods to every part of the country. It will also eliminate the cascading effect of taxes on customers which will bring efficiency in product costs. This is likely to benefit the e-commerce segment immensely given that their business model is dependent on connecting vendors and customers located across geographies.
While the idea of GST is expected to benefit the sector, the proposed mechanism of collection of tax at source (TCS) is likely to increase working capital requirements and administration and documentation workload for ecommerce firms.
The media sector is currently plagued with service tax as well as entertainment tax. GST is expected to bring a major change in this regard, and uniformity in businesses. Taxes could go down on account of a uniform tax rate. Multiplex chains will save on revenues as there will be a more uniform tax, unlike the current high rate of entertainment tax levied by different States, possibly resulting in a lower average ticket price, increasing ticket collections.
While the above sectors are expected to gain from GST, the Services sector is likely to be negatively impacted by GST on multiple counts. Some of the key factors in this regard have been captured below:
- Increase in tax rate on services under GST regime at (the expected rate of) 18 percent from the current levels of 15 percent (inclusive of SBC and KKC)
- Increase in compliances, ie requirement of separate registration in each State of operations. Multiple registrations against present benefit of centralised registration
- Increased compliance requirements such as segregated filing of returns in each State where registration is obtained
- Multiple points for payment of taxes against the single point under current regime
- Potential increase in the working capital; due to increase in tax rates
On account of the above factors, it is expected that implementation of GST would negatively impact the services sector. Increase in the tax rate from 15 percent to (the expected rate of) 18 percent is likely to increase the cost of such services, notwithstanding better creditability of taxes. As a result, some of the sectors that could be adversely impacted under GST include Telecommunication, Tourism and Hospitality, Insurance, Banking and Financial Services.
Nonetheless, as a whole, GST will be a game changer for the Indian economy as it would develop a common Indian market and reduce the cascading effect of tax on the cost of goods and services. Given that the Bill has been passed in both houses of the Indian Parliament, the target for roll-out of GST on April 1, 2017 appears to be well within reach.
As a result, it is highly pertinent that the Government as well as the industry prepares itself on time to transition into GST. Companies must make sure that their key areas of impact must be identified, training sessions must be conducted for their staff, supply chain, customer contracts, and vendor relationships must be re-examined, cost pattern must be re-evaluated and a GST ready ERP system must be set-up. While the companies may face initial hiccups transitioning into a more complex tax mode, what is expected to follow is an era of industrial growth and overall economic development.