WILL GST UNTANGLE INDIA’S TAX REGIME?

As the country awaits the roll out of a new tax system, the Goods and Services Tax, we look at how it might impact consumers and businesses

I n a week’s time, the country will embrace a new indirect tax system, the Goods and Services Tax (GST), which will dismantle state barriers to create a single national market, giving a boost to a host of economic and development goals. Lofty goals apart, the switch to a single tax from 1 July is set to throw up some surprises for consumers and businesses. Consumers will for the first time get a measure of the total central and state taxes levied on a product, ending a host of hidden and embedded taxes they paid so far.

GST on telecom services, for instance, has gone up to 18 per cent from the 15 per cent service tax rate at present. This has led to concerns about a possible increase in telephone bills, although the government has stressed that tax credits from the service tax paid earlier on spectrum payments will more than offset the rate hike.

“The jury is still out on the impact of GST on cost of telecom services as there is a lot of fine print. Once the new regime kicks in, we will get clarity based on the billing,” an executive with a telecom service provider said on condition of anonymity. The new indirect tax system is also set to test how digital savvy small traders are when it comes to filing tax returns.

The government, keen to ensure that GST is not inflationary, is in the process of setting up an anti-profiteering authority to probe cases where firms do not pass on any reduction in tax burden to consumers.

DISCOUNTS & CONCERNS

On their part, producers of items such as apparel and shoes, which have a seasonal market, are offloading their entire summer stock with discounts before July 1.

Harkirat Singh, managing director, Woodland Worldwide, said his company has kicked off its end-of-season sale ahead of GST’s introduction. “We are trying to liquidate our summer merchandise which we do not want to carry forward,” he said, adding that most of Woodland’s footwear falls in the high 18 per cent tax slab (GST has four slabs, ranging from 5 per cent to 28 per cent) which may translate into a marpayers, ginal increase in cost. “We have decided to absorb this cost and not to pass it on to consumers,” Singh said.

While most tax experts ruled out the possibility of supply disruptions, an industry executive, who spoke on condition of anonymity, said that some firms may optimise their stocks in the run-up to 1 July.

The government has already clarified that if businesses and traders produce documents for the taxes paid under the current system, full credit for such payments will be available under GST. This, the authorities believe, will prevent firms from reducing supplies in the weeks before the roll out. “Businesses are not changing their inventory and supply patterns but at the retail level, traders may be destocking in the run-up to GST and restocking in the months immediately after the transition,” said Anil Rai Gupta, chairman and managing director at lighting and electrical appliances company Havells India Ltd.

Praveen Khandelwal, national secretary general of Confederation of All India Traders, said it is business as usual for traders ahead of GST and that consumers need not worry about supply disruptions.

A TALE OF COMPROMISE

GST roll out is the result of more than a decade of discussions, tussles among states, and between states and the Union government. The highlight of the reform is the creation of a federal tax institution, the GST Council, which has state ministers as members and the finance minister as chairman and gives every state a say in it.

A seamless market of over a billion people and eight million registered indirect tax assessees, paying a single tax is likely to go a long way in achieving what the government has been trying to do through various measures – promoting the manufacturing sector, boosting exports, creating more jobs, improving the investment climate and cutting down tax evasion.

Ansh Bhargava, a senior consultant at Taxmann.com, a company that assists tax- believes the single market concept is akin to signing a free trade agreement between different states. Elimination of the tax-on-tax effect by providing credits will lead to lower costs.

Besides transparency, consumers are likely to benefit from lower tax burden. For businesses, elimination of multiple levies and creation of a single market with fewer tax rates and exemptions will improve the ease of doing business and reduce litigation. A large part of the tax litigation in India is around tax exemptions.

GOOD, BUT NOT THE BEST

The GST that is ready for implementation, however, is far from ideal. The guiding principle was that it is better to have a good GST instead of waiting for the best one. The final form has four rates – 5 per cent, 12 per cent, 18 per cent and 28 per cent for goods and services – with some items in the highest slab attracting an additional cess. Most of the items fall in the 12 per cent and 18 per cent slabs.

Five hydrocarbons – crude oil, petrol, diesel, natural gas and jet fuel – are temporarily kept out of GST. Nearly 40 per cent of state revenues are estimated to be from petroleum products. Liquor has been constitutionally kept out of the new tax regime. That was a compromise the Union government had to accept as states wanted the items on which tax collection is the easiest to be out of the new tax regime.

As of now, the Centre taxes production of goods and supply of services, while states get to tax sale of goods but not services. In GST, this barrier is removed and both the Union and state governments get to tax the entire value chain of goods and services, increasing compliance, explained VS Krishnan, adviser (tax policy group) at EY India and a former member of Central Board of Excise and Customs.

Some work remains. One of them is to clear rules regarding e-way bills, an electronic permit for movement of goods. According to Prashant Deshpande, partner at Deloitte Haskins & Sells Llp, the e-way bill rules need to be very practical and minimise compliance burden.

GST in the current form is a diluted one in comparison to the original concept, but experts welcome its roll out. “Introduction of GST is a very good start. Reforms, however, do not end here. Certain features can be further streamlined,” said Deshpande.