IMPACT ON GST ON THE ECONOMY- A Broad Perspective

By: Kartik Gupta

The Goods and Services Tax (GST) - the biggest reform in India’s indirect tax structure since the economy opened up 25 years ago at last looks set to become a reality. The Constitution (122nd) Amendment Bill, which came up in Rajya Sabha on 3rd August on the back of a broad political consensus was subsequently passed by the Lok Sabha on 8th August. The GST aims to subsume the current tax regime (which is riddled with a series of indirect taxes) with a single comprehensive tax, bringing it all under a single umbrella. The bill aims to eliminate the cascading effect of taxes on production and distribution prices on goods and services which is caused by different charges by union and state government respectively.

Key Benefits:

1. India becomes a single market, reducing cost and time on movement of goods.

2. More tax revenues for government yet lower tax burden for industry.

3. Reduction in paperwork & time wasted in paying taxes.

4. Increased exports between 10-14%

IMPACT on Various Sectors.

AUTOMOBILES

With no embedded tax costs on inter-state movement of goods (CST or non-creditable entry taxes), automakers would have greater flexibility to re-design their supply chains and thus, optimize logistics costs. Automobile exports shall also benefit with the elimination/ reduction in embedded tax costs.

However, the main issue facing the auto sector is the ambiguity regarding rate of GST - whether there would be a differential rate for mid-segment/ luxury-segment cars (as recommended by the CEA's report on GST rates). If yes, how would the segments be defined and what would be the change in the rates vis-à-vis small cars or the RNR (Revenue Neutral Rate), is the big question on industry's mind. Also, the model GST law is silent on the treatment of used-car sales which is another important area where clarity is required.

INFRASTRUCTURE

With the uniform tax, developers will have free input credits on GST paid for services and goods purchased by them which will reduce cost and can be passed as reduction to buyers. It will benefit real estate sector by ensuring a uniform tax structure and improve tax compliance by developers. It looks at bringing in greater transparency for the sector and may minimize unscrupulous transactions. GST will have a cascading effect for the home buyers, as developers with more margins in their hands will be able to restructure the cost of the products in favour of consumers.

OIL AND GAS INDUSTRY

The Oil & Gas Industry would largely be negatively impacted by the introduction of GST; the reason being that 5 petroleum products (ie crude, natural gas, ATF, diesel and petrol) are excluded from the coverage of GST for the initial years while the remaining petroleum products (for eg kerosene, naphtha, LPG, etc) are covered within the coverage of GST. Because of this peculiarity, this industry would be pained to comply with both the current tax regime as well as the GST regime.

MEDIA AND ENTERTAINMENT TAX

Since the levy of entertainment tax will remain the right of local bodies, chances are that under the GST regime, cinema tickets prices may come down though experts remain skeptic on the overall impact. DTH and cable television services are expected to become cost effective under the GST regime. But the quantum of DTH and cable bill will depend on the levy of entertainment tax.

FMCG

Consumer goods are expected to become cheaper under the GST regime as the current rates of taxation are in the range of 23-25 per cent while the GST rate is expected to be much lower. GST will also address the challenge of tax leakages in supply chain when procured products through contract manufacturing.

In order to prepare for the implementation of GST, the companies need to understand the GST policy development and its implications to scenario planning and preparing a transition roadmap.