It has been hailed as the biggest tax reform in India’s 70-year history as an independent nation. The good and services tax (GST) bill was passed into law by Rajya Sabha last August 3. With its implementation starting on April 1, 2017, it will create a national value-added tax in India and create a common national market in the country of 1.2 billion people.
The GST has been billed as a game-changer for the Indian economy. It will develop a common Indian market, minimize the cascading effect of the tax on the cost of goods and services, and affect almost all aspects of the business operation in the country—from the pricing of products and services, supply chain, accounting, and tax compliance.
The GST is basically a ‘destination-based tax’ meaning it will be levied on where the goods or services as consumed, and not where they are produced. It puts an end to the complicated, indirect tax system in India where the Center and the State levy overlapping taxes.
There have been proposals to amend the Constitution and change India’s tax system with the GST. Then the Prime Minister Atal Bihari Vajpayee had initiated the discussions on the GST. In 2006, Congress had looked into it. In March 2011, a constitution amendment bill was introduced but was lapped with the dissolution of the 15th Lok Sabha.
The enactment of the GST is definitely one of the highlights of Prime Minister Narendra Modi’s reign.
Why GST will move India Forward?
- The GST is a single tax levied on goods and services, from the manufacturer to the consumer. It subsumes various Central level taxes such as Central Excise duty, additional excise duty, service tax, countervailing duty, and special additional duty of customs. It also subsumes state-level taxes like sales tax, entertainment tax, purchase tax, entry tax, taxes on a lottery, betting, and gambling.
- GST is defined as any tax on goods and services other than alcohol for human consumption. It won’t also include taxes on petroleum products and stamp duty on an immovable property because these provide substantial revenue to the states.
- A centralized GST council will be set up. It will decide which taxes can be levied by states and which can be subsumed into the GST.
- The GST will be composed of central and state minister in charge of the finance portfolio. A dispute resolution mechanism will be established to resolve disputes regarding the GST.
- Petroleum products like crude, high-speed diesel and natural gas shall be subject to GST on a date to be determined by the GST council.
- Taxes on entertainment at panchayat, municipality, or district level will continue to be levied by states.
- States will continue to levy stamp duties that are typically imposed on a legal agreement by the central government.
The following are the expected benefits of GST on the Indian economy:
- Simplify taxation. GST will replace 17 indirect taxes that various states and the Central government levy on goods and services. It is also expected to reduce compliance costs.
- Reduce tax evasion. With a simplified taxation system, more traders will be encouraged to pay taxes.
For instance, a mobile phone distributor buys mobile phones from a manufacturer and sells it to a wholesaler. In the present system, the distributor has to bear the burden of paying excise duty. Thus, he’d rather pay without the invoice as it can add up to his total costs.
But with the GST in full effect, the distributor will gain credit for all the taxes paid at the previous stage. This would encourage him to pay with an invoice. Thus, it is expected that all traders will opt for taking a bill for their purchases.
- No more long queues at a checkpoint. Long queues of trucks at interstate checkpoints are one of the familiar sights in India. State authorities would have to review and examine freight then apply the relevant taxes and fees.
In fact, Indian trucks average a mere 80,000 kilometers a year no thanks to these delays and gridlocks. In comparison, trucks bringing various commodities across the US average 400,000 a year.
With the GST in full effect, those long lines at interstate checkpoints would be a thing of the past.
- Encourage the growth of small entrepreneurs. Because of the simplified taxation system, small entrepreneurs can set up a business in any state of the country without having to worry about tax differences. GST basically removes location bias and can encourage enterprising citizens to set up businesses in undeveloped locations.
- Improve GDP. The Finance Commission had commissioned a study that showed India’s GDP will improve to about 2 percent after the implementation of the GST.
- Goods/Services to become cheaper. For consumers, the GST will also mean lower prices of most goods and services except for liquor and tobacco. With the GST, overlapping taxes will no longer affect the prices of commodities. For example, the construction and building materials industry are projected to be one of the biggest beneficiaries of the GST thus products like paints and cement are absolutely going down. Moviegoers, meanwhile, will be paying less for a movie ticket as the GST will bring down the high 27 percent entertainment tax.
Effect on Key Industries
Many key sectors of India’s economy are projected to benefit from GST. Among these are:
- The Information technology sector will benefit from the elimination of multiple levies, and this is projected to result in deeper penetration of digital services in the country.
In India, most IT firms have different delivery centers and offices servicing a single contract. But with the GST rolled out, there’s a possibility that firms would require each delivery center to issue a separate invoice to a contracting party. The costs of electronic products like mobile phones and laptops are also anticipated to rise as duty on manufactured goods could go up to 18 percent from the current base of 14 percent.
- Fast-moving consumer goods. On the positive side, companies in the FMCG market will see a substantial reduction in their logistics and distribution costs. It has been shown that FMCG firms pay as much as 25 percent in taxes due to various levies like VAT, entry tax, and excise duty. With the GST, there could be a significant reduction in taxes of up to 17 percent.
On the flip side, however, prices may increase by 20 percent if the recommended 40 percent GST for tobacco and aerated beverages is approved.
- E-commerce. The Indian e-commerce industry is seen as one of the biggest beneficiaries of the GST. The sector’s growth has long been hampered by an archaic tax regime. After all, the old tax structure was created long before the e-commerce industry was born. Industry experts believe that the unified tax system will help the e-commerce sector to expand and spur the growth of online retail startups.
With the GST, dual taxation will be avoided. In the old system, states often have to ask where to levy the tax—the place where the seller is located, or the place where the buyer is located.
With the GST everything is clear now—the tax will be in the state where the consumer resides. Thus there will be no need to pay for other taxes like entry tax, VAT on sales, and excise on manufacturing.
The GST also means there will be no complicated paperwork that buyers online would have to accomplish. In 2015, several e-commerce firms like Amazon India and Snapdeal ceased delivering products in the northern Indian states of Uttar Pradesh and Uttarakhand because tax authorities in those states required the filing of VAT declaration form at the time of delivery.
- Buying Cars will become cheaper – Prices of vehicles could drop by as much as 8 percent as a result of lower taxes. However, the demand for commercial vehicles like trucks and delivery vans may be affected in the medium term because companies would no longer need to expand their fleet due to reduced time at checkpoints which translates to greater efficiency of their fleet.
- Expect More Movies Soon – Film producers and multiplex players are among the most taxed sectors in the country, having to deal with service tax, uniform tax, and entertainment tax. But with the GST, there will be uniformity in taxation and it is projected that taxes could go down by as much as 4 percent.
However, the new law will not be beneficial to all sectors of the economy. It will hurt certain industries such as the following:
- Airline industry. Flying will become more expensive in India. GST will replace service tax on fares which range between 6 and 9 percent, depending on the class of travel. But with GST, that rate will be between 15 and 18 percent. Meaning, it will better for you to purchase tickets from the United States.
- Insurance/ financial sectors. Insurance firms are likely to hike their premiums as taxes will go up to 300 basis points. Investors, meanwhile, will have to pay more for mutual fund products given that taxes would push it by 3 percent.
- The rollout of the GST could lead to a higher price of medications in the country. The GST can likely increase indirect tax by 60 percent, which pharmaceutical firms will likely pass on to consumers.
Aside from the negative impact of the new tax system on certain sectors of the Indian economy, there are also other challenges that need to be hurled such as:
- It can hurt the country’s own manufacturing industry – With Modi’s Government big push towards the “Make In India” Campaign – this might be a setback
One of the worries of those who opposed the GST is that it can lead to imports being cheaper compared to goods produced in India. Under the GST imports are entitled to a set-off against the final selling price which is not permissible under the existing tax regime.
Once the GST has been rolled out, it would replace taxes like countervailing duty, a special additional duty of customs, among others. With lesser taxes, the prices of imported goods in the market will likely go down as well.
That would have a detrimental effect on the manufacturing sector in India, which is beset by cumbersome labor, high taxes, and various regulatory laws in most states. As such, there is a fear that the GST would hurt the Make in India campaign.
- India will be implementing a complicated tax regime.
India will have the most complex version of a GST in the world. In most countries, GST pertains to one tax for all commodities and services. It is also applied throughout the nation.
In India, the central government and the states are allowed to concurrently levy GSTs. States can also levy service tax, which is a central levy. In effect, there will be 31 GST enactments (for the 29 Indian states and the territories of Delhi and Puducherry) needed.
Moreover, states will be able to levy sales on potable alcohol, aviation fuel, diesel, and petrol. On the other hand, the central government can levy excise duty on all other goods including tobacco and tobacco products.
- Other issues to be addressed.
There will also be a lot of issues that need to be addressed on e-commerce transactions and restricted credit. Although each state will have its own GST, there will be multiple rules for each act. Moreover, there will be separate credit rules for integrated GST, central GST, and state GST. Studies also suggest there will be a substantial increase in the costs of paperwork and compliance.
With these issues to be addressed, many quarters are calling for the implementation in stages. The argument that this strategy will reveal possible hurdles in need of attention, as well as improving the IT infrastructure that is vital to a successful GST.
Although there are apprehensions on the implementation of the GT one thing is for sure—many sectors of the economy are looking forward to the day when the GST will be finally implemented. From the looks of it, this could be one way to help the third-largest economy in Asia expand even further.