INTRODUCTION:

Introduction of GST would be a very significant step in the field of indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a single tax and allowing set off of prior-stage taxes, it would mitigate the ill effects of cascading and pave the way for a common national market. For the consumers, the biggest gain would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%. Introduction of GST would also make our products competitive in the domestic and international markets. Studies show that this would instantly spur economic growth. There may also be revenue gain for the Centre and the States due to widening of the tax base, increase in trade volumes and improved tax compliance. Last but not the least, this tax, because of its transparent character, would be easier to administer.

What is tax?

The economic case for GST is straightforward: Income is taxed irrespective of source and use; therefore, consumption should also be taxed on the same principle. GST is one of the widely accepted indirect taxation system prevalent in more than 150 countries across the globe. Globally, GST has been structured as a destination based comprehensive tax levied at a specified rate on sale and consumption of goods and services within a country. GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer’s point and service provider’s point up to the retailer’s level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholesaler and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the whole seller. When the whole seller sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to whole seller. Thus, the manufacturer, whole seller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well.

Impact on India

Prices of goods to decline cost of services to increase, exports to get a boost:

The effective indirect tax incidence is expected to decline post the implementation of GST due to removal of the cascading effect arising from the non-availability of input tax credits across the value chain and between states and removal of tax-on-tax (e g. VAT levied on excise inclusive price). The standard excise duty of 12.5% and VAT of 12.5-15% along with cess, entry taxes and CST take the effective tax rate up to 26-30% in the current system which will drop to a standard rate of 17-18% under the GST. However, the prices of goods that are currently exempt from excise duty or sales tax or are subject to concessional rates are set to increase as the list of exemption under the GST will be lowered. Since GST is a tax on consumption (destination-based), exports would be zero-rated, i.e. export prices would not include any taxes. Currently, exports are reimbursed for central indirect taxes (excise and customs duties) but don’t get full offsets for CST and certain state-level taxes such as entry taxes and octroi. Post GST, this non-rebated indirect tax induced distortions would be removed, enhancing competitiveness of Indian exporters. Tax on Services will go up to 18% standard rate from 14% currently.

Based on our analysis below, GST will be largely a beneficiary for Automobiles, Cement, Media and Entertainment sector. GST will have a negative impact on service industries such as restaurants and quick service restaurants (QSR). Impact of GST for hotels will be depend on its location whereas for real estate it will depend on its treatment with regards to agreement value.

Cement - Positive

With GST implementation, we expect the overall tax incidence on the sector to potentially decline. Typically, indirect taxes in the sector are close to 28-30% which would potentially come down post GST implementation to the effective tax rate. Further, the sector will also benefit from expected decline in logistics costs with consolidation of warehouses especially for large players with a pan-India presence.

Media and Entertainment - Positive

Media and Entertainment Multiplex- Positive

Multiplexes would be a key beneficiary of GST. At present, multiplexes pay local state taxes like entertainment tax and VAT on overall revenues including food and beverages. In addition, they also pay service tax on projector equipment, utility, security, housekeeping and other cost which are paid to central government. The blended average rate for multiplex players would be ~24-25% across the country which would reduce to ~18%.

Retailing – Positive (especially organised retailers)

Rentals which is one of the major costs for retailers attracts service tax of 14.5%. The retailers cannot set-off this costs like the other industries as the companies trading goods (retailers), which pay VAT, are not allowed to claim credit for the service tax paid on different items since they have no central tax against which this can be set off. This creates additional operating expenses for the players. However, passing of GST bill will now allow these indirect taxes (service tax) on lease rental to be set off. This will help in expansion of profitability margin. Further, the bill will also help organised retailers as the single tax will bring majority of transactions of unorganised players under the tax net and thereby reduce the price gap in retail prices of various items.

Pharmaceuticals - Neutral

GST for pharma companies likely to remain similar to the current effective tax rate of ~12%. However, as the pharma industry receives area based exemption on indirect taxes, any changes in the exemption or re-negotiation of Memorandum of understanding (MoUs) between the government (state, central) and the companies can have a slight negative impact on the sector. GST will enable pharma companies to rationalize their distribution networks through consolidation of depots/warehouses and better inventory management.

Oil and Gas - Neutral

The Oil and Gas Industry would largely be marginally impacted by the introduction of GST; the reason being that 5 petroleum products (i e crude, natural gas, ATF, diesel and petrol) are excluded from the coverage of GST for the initial years while the remaining petroleum products (for e g kerosene, naphtha, LPG, etc) are covered within the coverage of GST. As a result, the industry would be required to comply with both the current tax regime as well as the GST regime. So, overall impact is neutral.

Agri-commodities: Tea, Sugar, Cotton – neutral

Most of the agri-commodities have a concessional rate of tax less than 10%. Being essential commodities, it is unlikely the GST rates will be different from the current concessional rates.

Hotels – GST impact will be based on the location

Hotel rooms currently attract Service tax and Luxury tax. While Service tax is levied by the union government and currently stands at 8.7% (taking into account the abatement rate of 40%, Swacch Bharat Cess and Krishi Kalyan Cess), Luxury tax is a state subject. Luxury tax rate currently varies between 5% - 12.5% depending on the state. Therefore, we believe that the impact of GST on hotels will be negative or positive depending on the rate as well as the state in which the property is located. Five star hotels could attract a higher rate of 40% under GST regime, which will be a negative.

Steel - Neutral

With GST implementation, we expect the overall tax incidence on the sector to potentially remain same with a marginally positive impact in states imposing high VAT considering that the steel producing states are not the key consuming centres; thereby attracting high VAT (state-specific).

Typically indirect taxes in the sector are close to 15-18% depending upon whether the sales are within or outside the state. If the GST is levied at 18% the effective tax rate will remain at similar levels and there will be no visible impact on the steel sector (slight positive bias).

Inflation to rise in the short run

The impact on inflation depends on the GST rate adopted. In the short run, we see inflation edging up, especially for services. Currently, the government levies a 14.5% tax on services. With the GST rate likely to be closer to, or above 18%, services are expected to see higher inflation. On the other hand, manufacturing goods inflation will be lower because, given that they already pay 24-25% state and central taxes, the advent of GST lowers the incidence drastically.

The CPI-based inflation calculation assigns close to 30% weight to services. Assuming that the GST rate is set at 18%, tax on services will increase and raise inflation by 60 basis points over the short run.

CONCLUSION:

The enumeration of benefits casts a welcome setting for GST.

Proving GST as a superior and sufficient system depends upon the structure it is designed into and the manner of implementation.

While it serves to be beneficial set up for the Industry and the Consumer, it would lead to increase in revenue to Government.

REFERENCES:

(1) CRISIL Research, CEA-led Committee report

(2) Ahmad, E. and N. Stern (1984), “The theory of tax reform and Indian indirect taxes,” Journal of Public Economics, 25, 259-98

(3) Poddar, Satya and Amaresh Bagchi (2007), “Revenue-neutral rate for GST”, The Economic Times, November 15, 2007.

(4) Ahmad, Ehtisham (2008), “Tax Reforms and the Sequencing of Intergovernmental Reforms in China: Preconditions for a Xiaokang Society,” in Lou Jiwei and Wang Shuilin (eds), Fiscal Reforms in China, The World Bank.

(5) www.taxguru.in/goods-and-service-tax/goods-service-tax-gst2.html

Received on 29.05.2017 Modified on 05.06.2017

Int. J. Ad. Social Sciences. 2017; 5(3):180-182.

Stage of supply chain	Purchase value of input	Value Addition	Value at Which Supply and Goods Services made to Next services	Rate of GST	GST on Output	Input Tax Credit	Net GST=GST On Output-Input tax Credit
Manufacturer	100	50	150	10%	15	10	15-10=5
Whole Seller	150	30	180	10%	18	15	18-15=3
Retailer	180	20	200	10%	20	18	20-18=2