India is a federal nation with a three tier governance structure for indirect tax administration as at central level, state level and at local level i.e. municipality and Panchayats to whom power is conferred by the respective state governments as required by 73rd& 74th constitutional amendment. Also India has a unique demography with 63.4% population in age bracket (15-64) with one of the fastest growing economy across the world amid events like Brexit, rising protectionism with a contribution about 66.1% of GDP from service sector itself (2015-16) with growth rate 8.4%, 17.4% by manufacturing with a growth rate of 3.1% and rest agriculture and allied sector with a meager growth rate of 1.1%. In such an economic scenario and given the fact that 46% of the tax revenue is generated by indirect taxes and India is a hot destination for FDI, an advocacy for efficient tax administration can’t be overemphasized. But, our (Past) indirect taxation system was characterized by cascading problem, complex laws, multiple taxes at multi point with a huge compliance cost and causing distortion in markets because of lack of uniformity and common Indian market.On historic day of August 3, 2016, parliament passed 101st constitutional amendment Act giving green signal to GST i.e. Goods and service tax which will pave the way for one nation, one market, one tax. This write-up is an attempt to understand all aspects of GST like the need for it, benefits and problems associated with it and its holistic impact on diverse social and economic fabric of “BHARAT”
Above is the extract of the research document which I had presented in my college – SRCC in May 2017 just before GST roll-out. Here I am providing the full document and after that I have written about the developments which have occurred post GST roll-out:
TOPIC: GOODS AND SERVICE TAXATION
A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR DEGREE OF B.COM (H) UNIVERSITY OF DELHI
BY: TARUN GOYAL
India is a federal nation with a three-tier governance structure for indirect tax administration as at central level, state level and at local level i.e. municipality and Panchayats to whom power is conferred by the respective state governments as required by 73rd& 74th constitutional amendment. Also, India has a unique demography with 63.4% population in age bracket (15-64) with the fastest growing economy across the world amid events like Brexit, rising protectionism with a contribution about 66.1% of GDP from service sector itself 2015-16 with growth rate 8.4%, 17.4% by manufacturing with a growth rate of 3.1% and rest agriculture and allied sector with a meagre growth rate of 1.1%. In such an economic scenario and given the fact that 46% of the tax revenue is generated by indirect taxes and India is a hot destination for FDI, an advocacy for efficient tax administration can’t be overemphasized. But, our current indirect taxation system is characterized by cascading problem, complex laws, multiple taxes at multi point with a huge compliance cost and causing distortion in markets because lack of uniformity and common Indian market. However, on historic day of August 3, 2016, parliament passed 101st constitutional amendment Act giving green signal to GST i.e. Goods and service tax which will pave the way for one nation, one market, one tax. This document is an attempt to understand all aspects of GST like the need for it, benefits and problems associated with it and its holistic impact on diverse social and economic fabric of “BHARAT”.
This project work is an attempt to review the prominent literature available on the GST including research articles of various scholars.
What is GST?
GST is an indirect tax system in which a common tax is levied with no distinction in goods and services at the point of consumption. In India, it will subsume almost all the existing indirect taxes levied by centre, states and at the local administration level under one value added tax. Credit of input tax paid is available from output tax paid and this set off operates through manufacturing and distribution stage of production and addresses cascading.
A comparative analysis of existing indirect tax system and GST:
PRS legislative research in its analysis of GST bill 2014 has given a comparison in the GST and existing tax structure:
It also mentions that since many of the current taxes levied are outside the “input tax credit mechanism”, it is leading to cascading effect which in turn increases the final cost of goods. GST will be instrumental in solving this problem to a great extent and would increases the competitiveness of Indian goods. Illustration:
Above example clearly shows that since the retailer can’t get input tax credit of excise duty paid from the output sales tax, that excise duty gets added in the RETAILER’s cost.
The PRS legislative mentions salient features and some issues with the GST in its analysis of GST bill 2014, draft “central and state GST bill”, “model GST (compensation to the states for loss of revenue Bill 2016” and “integrated GST bill” as provided here under:
GST – A Background
Concept of value added tax (VAT) was firstly introduced in MODVAT & CENVAT i.e. in excise duty in 1986 which gave solution for cascading problem by tax credit mechanism. However, the problem continued as many items were outside VAT regime like Real estate, oil & gas etc. also, different states have different tax provisions adding to complexity. Therefore, 115th constitutional amendment bill 2011 was introduced to bring single value added tax i.e. GST which is expected to broaden tax base, subsume all existing taxes, increasing tax compliance and reducing economic distortions arising out of inter- state tax variations. However, it could not be passed because of dissolution of 15th loksabha. Then 122nd constitutional amendment bill was introduced in 2014 and finally it was passed on Aug. 3 2016 as 101st constitutional amendment act.
It will subsume many existing taxes which are provided as under:
At centre: central excise, CST, CVD, SAD, service tax, cess and surcharge as far as they relate to goods and services.
At states and local level: state VAT, purchase tax, luxury tax, all forms of entry tax, entertainment tax except those levied by local bodies, advertisement tax, tax on lottery, batting and gambling, cess and surcharges so far they relate to goods and services.
However, GST excludes “alcoholic liquor for human consumption”, stamp duty, custom duty, sale of electricity from its purview and GST on five petroleum products i.e. petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel is to be applied at a later date. But petroleum products are input to so many goods and exempting them from GST could lead to cascading of taxes because of non-availability of tax credit of these products and so it can distort GST and may lead to leakage of revenues. The 13th finance commission and department of revenues have recommended that alcohol and petroleum products be brought under GST.
It includes union finance minister (1/3) voting rights and ministers of finance and taxation of respective state governments (2/3) voting rights. It shall provide dispute settlement mechanism and other matters and requires 75% support for any decision to be taken.
Power to levy GST
Both parliament and state legislatures shall have power to make laws on GST and laws made by parliament shall not override state laws.
Centre shall have exclusive power to levy IGST (integrated goods and service tax) on inter- state trade and commerce, imports and exports and supplies to and from SEZs. IGST tax rate shall not exceed 28%.
IGST revenue shall be apportioned between the centre and state where the supply of goods and services happened.
In intra state trade, centre shall levy CGST (central GST) and states shall levy SGST (states GST) the tax rate for which shall not exceed 14% each.
Compensation mechanism to states for revenue loss post GST
Compensation to states shall be given for a period of 5 years from the date of its coming into force in a state which has to be released at the end of every quarter. Annual calculation shall be audited by CAG.
A GST COMPENSATION CESS MAY BE LEVIED ON SUPPLY OF CERTAIN GOODS AND SERVICES THE RECIEPT OF WHICH SHALL BE DEPOSITED IN GST COMPENSATION FUND TO PROVIDE FOR ANY REVENUE LOSS TO STATES.
Some Compliance Provisions
Threshold limit for registration in GST is turnover of Rs.20lakhs which is 10lakhs for special category states. A person may have multiple registrations for different business verticals in a state.
Monthly return is to be filed with annual return. Appeals can be made in NAT (national appellate tribunal). Every taxpayer will get compliance rating.
ANTI PROFITEERING MEASURE
Central government, may, by law make an authority to examine if reduction in tax rates has resulted in commensurate reduction in prices of goods and services and impose a penalty if the prices have not been reduced.
ANALYZING “ANTI PROFITEERING” PROVISION
(Pratik jain (partner and leader, 2017)in an article published in ‘Livemint’ dated 01-Jan-2017 titled “GST: anti profiteering measure necessary?” has made a detailed analysis of the above provision. He suggests:
Competition and open market place is the best tool for keeping prices in check. Oversees experiences indicate that anti profiteering provisions are only effective if there is significant lead time to allow relevant authority to educate consumers and businesses as to their rights and obligations. But, in India, because of very short lead time, it is less effective. Australia was first country to enact similar provisions in 2000 and ACCC (Australian competition and consumer commission) was given responsibility to monitor prices. ACCC noted, “Any well informed competitive market operating in a climate of low inflation and good corporate citizenship will ensure that the vast majority of business will act fairly.” Malaysia also made such provision while introducing GST in 2015. But, it leads to widespread litigation and was found to be administratively difficult to implement. Also, no business can survive by exploiting the consumers. Indian businesses and consumers are well placed to enjoy the benefits of GST without government price monitoring.
ECONOMIC SURVEY 2016-17 on GST
Economic survey [chapter 11, page 240-242] highlights that at present the CST in the states might be encouraging Inter-state trade and commerce instead of becoming a barrier in it. Suppose you are a dealer and to avoid high VAT in your state you might like to purchase that product from other state if you are final consumer of the product. Survey highlights that this happens frequently particularly in products like petrol, diesel, construction material. Also, many states maintain a negative list of many items for which tax credit is not available even in their state like at least 22% of total imports in Andhra Pradesh comprises items of such negative list. In this case, when GST is implemented, by eliminating those distortions, it will actually lead to normalizing the internal trade.
It pitched for coverage of land and other immovable property in GST. In survey’s words:
“A GST with broad coverage to include activities that are sources of black money creation- land and other immovable property- should be implemented. The GST will create a common Indian market, improving tax compliance and governance and boost investment and growth; it is also a bold new experiment in the governance of India’s cooperative federalism. Over the medium term, the implementation of the GST, follow-up to demonetization and enacting other structural reforms should take the economy towards its potential real GDP growth of 8% to 10%.”
KEY DECISIONS OF GST COUNCIL
DUAL CONTROL OVER TAXATION BASE
The administration and assessment of the entire taxpayer’s base will be shared between the central and state governments in the following manner:
DUAL CONTROL OVER TAXATION BASE
|Turnover||Central Govt.||State Govt.|
|Turnover || 10%|| 90%
|Turnover => INR 1.5 Cr.||50%||50%|
The selection of the taxpayer will be determined automatically by the GSTN common portal.
PROTEST OF GST COUNCIL DECISION:
THE HINDU, in article titled, “Tax officials to sport black bands to protest GST council decisions” dated 30 Jan 2017 highlighted the protest of IRS ASSOCIATION. According to the body, the council’s decision to give control of 90% of tax assessees below an annual turnover of INR 1.5 Cr to the states will lead to a depletion of taxpayer base with the centre. It is felt that the basic structure of the scheme is being compromised and the same may lead to utmost chaos which may be detrimental not only to the revenue but also to the industry, trade and commerce in general.
The area of 12 nautical miles into territorial waters will be part of union government’s territory. However, state governments will be empowered to collect tax on economic activities undertaken in such area.
TAX RATE STRUCTURE
In an article published on firstpost titled, “GST council fixes 4- rate structure- all you need to know about the extremely complex tax reform” dated, 4 Nov 2016, insights have been given of tax structure decided by GST council:
The four bands of tax rates have been fixed at 5 percent, 12 percent, 18 percent and 28 percent. Demerit goods or sin goods such as luxury cars, pan masala, aerated drinks, and tobacco and tobacco products, will invite a tax of 28 percent plus the cess. The overall incidence with cess, thus, could vary between 40 per cent and 65 per cent. There has been no consensus yet on tax rate for gold, land, under construction property. A cess in order to raise funds to compensate states for the revenue losses shall be levied on luxury cars, tobacco, aerated drinks etc, Food grains will be zero-rated to insulate people from inflationary pressures. Most white goods, like washing machines, air conditioners, refrigerators, shampoo, shaving stuff and soap, will be taxed at 28 percent (with riders). The current levy varies between nil to 30-31 percent. The rider has been set as there are several items which are used by the lower middle class. Model GST Law suggests multiple registrations in each state for supply of goods and services. This has the potential to result in huge burden of complexity,” said Naushad, President, Confederation of Indian Industry (CII). Forbes wants the government to eventually converge to one or two rates.
Will the rate structure increase inflation?
Presenting its proposal for a 6-26 percent four-tier rate structure at the earlier GST Council meeting, the Centre had estimated the inflation impact as follows: The overall impact on the consumer price index (-)0.6 percent. The break up: on health services 0.56 percent; fuel and lighting 0.05 percent; clothing 0.23 percent; transport (-) 0.65 percent; education (-)0.08 percent; housing (-)0.09 percent.
MS Mani, Senior Director, Deloitte Haskins & Sells LLP says It is also necessary to ensure that majority of manufactured products are kept at 18 percent and the temptation to push more products into the 28 percent slab should be resisted,”
Former finance secretary and tax expert Vijay Kelkar had termed the four-tier structure as “disappointing”. According to him it “robs the GST of its efficiency enhancing potential” One rate is a crucial part of the structure. It would enable the levy of a single low rate on a very broad and comprehensive base, eliminating litigation and rent-seeking on classification disputes, promoting voluntary compliance and ensuring simple and effective implementation.
IMPACT ANALYSIS OF GST
RAJNEET MEHTA (director at PHD chamber of commerce and industry), in his article published in YOJNA in November (a development monthly of publication division, GOI) titled, “GST, GAME CHANGER FOR INDIAN ECONOMY?” has given a detailed analysis on sectors including real estate, healthcare, banking and financial sector, travel, tourism and industry and education sector among others and an account of overall benefits of GST:
MAJOR BENEFITS OF GST
GST will lead to reduction of cascading effect as now there is no multiple taxation and thus the goods particularly the CAPITAL GOODS & CONSUMER DURABLES will become cheaper which in turn will increase capitalization in the economy which will have multiple add on effect on the growth rate of economy. GST will increase FORMALISATION in the economy which is the bedrock of an inclusive society and holistic development. It will happen because of lesser compliance cost and simple administration procedures and thus greater incentives to increase scale of business; Incentives like easy availability of formal credit by certification of accounts even of small sector producers like barber, milk seller etc; Availability of benefits of various schemes of GoI including interest subvention, export subsidies, import licenses and also opportunity to capture wider market and going global. It will incentivise to purchase from a registered dealer because of the availability of tax credit and thus creating a ‘SELF POLICING CULTURE’. It will lead to massive tax collection to the states as well as central government as now tax base and tax buoyancy (percentage growth of tax collection with percentage growth in GDP) and thus public investment will pick up while maintaining fiscal prudence. Balanced regional growth will be possible because GST will increase the resources available for poverty alleviation and development of the country not merely because tax base becomes more buoyant but also because resources of poorest states (Bihar, MP, Chhattisgarh, Jharkhand, UP) whose per capita GSDP is less will increase substantially as theses states happen to be the large consumers as well and now states will have a share in service tax as well. Thus India will be able to meet its commitment under SDG-1 which states, END POVERTY IN ALL FORMS EVERYWHERE. Also, overall tax burden on consumers will decline and it will promote transparency in prices because of greater use of IT. GST also removes custom duty applicable on exports while it is levied on imports thus, the negative protection favouring imports would be eliminated. Wasted of perishable items being transported will reduce because of reduced barriers like check posts and the need to maintain large buffer stocks and thus big warehouses. It will make food processing industry competitive.
REAL ESTATE SECTOR
The real estate sector has strong economic multiplier effects through backward and forward linkages. Construction is the second largest employment generator in the country after agriculture. Under the current IDT (indirect tax) regime, the real estate industry has been embroiled in disputes due to ambiguity in provisions as well as multi-taxation. Sale of under construction property attracts multiple taxes under the current regime, leading to cascading and higher cost burdon on house purchases. GST is likely to result in transparency in real estate sector, which will significantly reduce tax evasion through more efficient transaction tracking methods and improved enforcement and compliance.
HEALTH CARE SERCTOR
One of the major concern is the inverted duty structure that adversely affects domestic manufacturers, cost of input being higher than output. It discourages investment in the industry. GST may either remove the inverted duty structure or allow refund of accumulated credit. GST is expected to have a positive effect on Pharmaceutical sector since 8 different taxes are levied at the industry at present. Consolidation of all of them into one would promote ease of doing business. GST will also result in operational efficiency by streamlining the supply chain can alone add 2% to India’s pharmaceutical market size.
BANKING AND FINANCIAL SERVICES
In India, most of the banking and financial services are exposed to service tax, @15% while GST is expected to be 18%-20%. Thus services are likely to become costlier. Due to GST, financial service providers may be required to adhere to compliances across multiple states instead of current single, centralized registration compliances. As GST is destination based tax, it might be a challenge to determine the destination of certain services. This may lead to difficulty in determining SGST, CGST, IGST on B2B and B2C transactions.
TRAVEL, TOURISM AND HOSPITALITY
This industry currently faces multiple taxes levied both by centre and states. It is expected that under GST, suppliers of hotels and restaurants will be subjected to a single tax. However, it may lead to increase in tax rates.
Education sector currently enjoys various tax exemptions and benefits as services provided by schools and colleges is covered in negative list. Situation is likely to continue even after implementation of GST.
Aanand laddha (research analyst) and Sahil Kapoor (Chief Market Strategist of Edelweiss Securities), in the article published in economic times titled “GST will Change the way India does business; WHO WILL WIN, WHO WILL LOSE” dated Aug3 2016 have analyzed the likely impact of GST on various sectors. Their analysis is insightful.
A glimpse of the impact on various sectors is as under:
Current effective tax rate is 30%-47%. Expected GST rate is 20-22%. It is expected to drive overall demand and reduce cost for the user by about 10%. Transportation time and overall cost will be reduced as goods will be transferred from one state to other by easily surpassing various octroi and check points. So, it will be positive for automobile sector in long run.
Key beneficiaries: Bajaj, Maruti, Ashok Leyland.
Current tax rate is 7-30%. GST will essentially benefit those which have not availed tax exemptions in the past. It will lead to reduction in price gap between organized and unorganized sector. Reduction in warehouse/logistics costs across operational and non-operational segments will improve the operational profitability by almost 3-4%. The 7th pay commission is also expected to boost demand and fund inflow in the consumer durables.
IMPACT: neutral or negative for those companies which enjoy either tax exemptions or fall in concessional tax bracket.
Key Beneficiaries: Havells, symphony, Hitachi
FMCG: Neutral or negative for those who enjoy concessional rate or exemptions.
FURNISHING AND HOME DÉCOR
Paints and other construction chemicals companies will benefit from lower tax rate. At present, market share for organized sector is 65-70%. Post GST, price difference among organized and unmorganised sector will be narrowed. It will improve oppourtunities for unorganized sector. Overall cost and competitiveness in products like ceramic tiles, sanitary, plywood will come down.
Key Beneficiaries: Asian paints, berger, HSIL, H&R Johnson.
GST will lead to lower transit time and greater utilization of truck capacity. It will boost demand for high tonnage trucks with a seemless inter-state flow of goods and lead to overall reduction in transportation cost. At present, logistics segment is fragmented and comprise many unorganized players who avoid tax which generates cost gap between them and organized players. So, it will create growth opportunities for many organized players.
Key Beneficiaries: VRS logistics, GATI, blue dart
Current tax is 27-32% which is expected to decline to 18-20%. It will lead to savings in transport cost also due to rationalization of warehouses and reduced transit time.
Beneficiaries: ACC, Ultratech.
Current tax rate for base metal products is 19-21%. But expected tax rate under GST is not known.
Currently they are subject to service tax @15% which is expected to increase to 18% under GST but availability of input tax credit will lower the sector’s capex cost. So, increase in effective tax may only be marginally negative for the sector.
IT & ITeS
Currently, effective tax is 14% which is expected to increase to 18-20%. But, the industry earns large part of its revenue from exports which will continue to be exempt under GST. Litigation regarding softwares will come to an end as there is no difference between goods and services. So, it will be neutral to slightly negative.
TEXTILES & GARMENTS
Current effective rate is 6-7% but expected rate is not known.
It attracts different taxes like service tax, entertainment tax, VAT. Effective tax is 22-24% which is expected to come down to 18-20%. At present, only limited tax credit is available of service tax paid on lease rentals, advertisements, security charges etc. also, no tax credit is available on taxes paid on capital expenditure. These will be addressed under GST and impact will be positive and benefit PVR, Inox Leisure.
Effective tax rate for D2H providers is 20-21% and for broadcasters is 14-15%. After GST 18-20% tax is expected and concessional rate for news and print sector which at present is exempt.
Beneficiaries: Dish TV
Marginally negative: ZEE, Sun, Jagran etc.
GST AND MANUFACTURING SECTOR
Amiya Kumar Mohapatra, (associate professor of fortune institute of international business), in his article, “GST: rejuvenating the manufacturing sector” published in “YOJNA” has highlighted likely impact of GST on manufacturing in India in harmony with other initiatives of government of India:
The richness of India’s demographic dividend needs to be properly utilised to accelerate our development process and to achieve higher GDP. The benefits of the demographic dividend can be realized only by making these youths productive in terms of health, education and skill development. To attain this, Indian manufacturing sector has great potential to absorb these youths and provide them the right forum to make them skilful. India’s manufacturing sector contribution is approximately around 16% to GDP.
NATIONAL MANUFACTURING POLICY AND MAKE IN INDIA
To break the vicious circle and stagnation of manufacturing sector, Government of India has formulated ‘National Manufacturing Policy’ to promote this sector and has taken various initiatives to trigger growth to its potential and set a target of achieving 25% of GDP by 2025. Indian manufacturing sector has great potential to create 90 million jobs and is able to produce USD 1 trillion and can contribute approximately 25-30% to GDP by 2025 (McKinsey Report, 2012) .To achieve the same, ‘National Investment and Manufacturing Zone (NIMZ)’ has been created to boost the sector. NIMZ planned to have single window to provide solutions and approvals to the sector and contribute in ease of doing regulations and laws, leverage on incentives etc. Make in India’ initiative brought unprecedented changes in the investment landscape of India. Multi National Companies are invited and encouraged to contribute in manufacturing sector. Government has created necessary avenues for making ‘Make in India’ successful and ‘Skill India’ to unleash the true potential of manufacturing sector.
GST will break the inter-state barriers across the states and will develop a common national market making the manufacturing sector more competitive in India and world as well. Government has taken initiatives to create a litigation-free, investors-friendly environment to make India a hub of global manufacturing. Government has made provisions for start-ups, new manufacturing companies and small sectors with tax deductions. To reduce cost and improve competitiveness among domestic manufacturing industries, government has reduced custom and excise duties on certain inputs to make ‘Make in India’ scheme attractive along with reinstating the exemption of MAT for non-resident investors. Manufacturing sector can be strengthened through fiscal interventions like tax concession, tax reduction on the manufacturing process, especially on import of technology and R&D. Policy paradigm is the need of the hour and the initiatives undertaken by the government depends upon the outcome and their effectiveness rely on how the government monitor and implement the schemes meant for overall development of the nation and manufacturing sector in particular.
GST – THE INTERNATIONAL EXPERIENCE
Pravakar Sahoo (professor at institute of economic growth, New Delhi) and Ashwani Bishnoi (professor at national institute of technology, Kurukshetra) in article titled, “Goods and service tax: the international experiences” published in “YOJNA” in November has summed up some experiences of other countries who have already embraced GST:
France was one of the first countries to implement GST in 1954, followed by Germany, UK, CANADA and Brazil have dual GST like India. GST has made these economies more competitive, help improve exports, generate more revenues to the exchequer and stabilize prices. Australia implemented GST IN 2000 and has experienced positive outcomes in terms of tax revenues and current account balance. International experience shows that inflation went up in the short term as a lot of new services and goods are taxed under GST which was not taxed earlier. Lesson from Malaysia is that businesses need to start early with the implementation process to be GST ready. The International experience with GST suggests that it is necessary to keep the exemptions to the minimum. Among different countries, New Zealand has the least number of exemptions and the most comprehensive coverage of GST. It is important to resist the political pressures to accord exemptions to fulfill ostensible objectives of equity, administrative ease, regional development and many more. USA still has not adopted GST because of strict federal structure and CHINA is on the path of adopting it.
GST AND BLACK MONEY
Dilasha seth (special correspondent of Business Standard and Economic Times) in the article, “Black money menace- government on war footing” published in “YOJNA November” has highlighted efforts of present government to fight black money and how GST is just another step into that:
Passing Black money (undisclosed foreign income and assets) and imposition of tax act 2015, Project Insight to profile people using PAN, FATCA (Indo US foreign account tax compliance act to ensure that the tax is paid on wealth generated abroad, revising DTAA with Mauritius, Singapore and Cyprus, signing APAs, demonetization , passing “ Benami transaction act”, promoting digital economy, GAAR and BEPS and finally, GST will help to check black money generation because of digitization, harnessing IT capabilities and data mining and increasing voluntary compliance.
In the words of Hon. PM of India, “GST is a ‘Great step by team India’, ‘Great step towards transformation’ and a ‘Great step towards transparency’.”
In the present times, some global challenges are facing Indian economy. Rising protectionism ideology across the continents, Brexit, turbulence in west Asia over war in Syria and expectation of rise in prices of crude oil of which India is one of the major importer are some of the challenges in front of national economy. However, India has many opportunities also including, young demography, stable political environment, fiscal prudence with inflation and fiscal deficit under manageable limit, sustainable demand of the wide rural population, good monsoon and a wide range of initiatives by the government to increase job opportunities by facilitating business in India easily. Today, India is shining as a bright spot for the purpose of stable investment as is evidenced by the fact that India has become the sixth largest manufacturing hub in the world and its growth potential has been recognized and widely appreciated across the globe by all international institutions of repute like WB, IMF, WEF, UN to name a few. Reform in the economy is an ongoing phenomenon and GST is a major contributor to it since last major financial reforms undertaken in the after math of BOP crises in 1990’s. Though the real results of it shall be determined by the time to come and are depended upon the implementation of it. The success of it will be determined by the fact that how it makes present jobless growth an inclusive growth. For this to happen, all the principles of good governance are to be adhered to by its all implementing agencies.
As Mahatma Gandhi has said “A RIGHT CRAUSE NEVER FAILS”.
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Now let us talk about the developments of POST GST rollout since 1 July 2017.
Though it is quite normal that glitches will be there when the taxation system of a continental sized country go for such a massive overhaul.
There has been some criticism but they have been rightly quashed in Economic Survey 2016-17 (volume 2). We can discuss these allegations one by one:
It is very complex
It is alleged that the rate structure has robbed GST of its efficiency and has made it very complex.
But, Economic survey (ES) argues that VAT system at states level had generally 4 bands of taxes and excise had about 10 different rates. That to, tax system varied across all 29 states. Now you have only one common tax system across India and it has only 6 rates.
Also, Hon. Finance minister Arun Jaitley pointed out that we can’t have one RNR (Revenue neutral rate) and a “Hawaichappal” Can’t be taxed at the same rate as “Hawaijahaj” ticket.
Given the diversity of the Nation and the fact that 22% population is Below poverty line (BPL) and uncertainty over what would have been the revenue collections of centre and states had there been only one MAGIC RATE, risk was high that it might not create delicate and fragile consensus required for constitutional amendment and also that it might not have been able to fulfil the mandate of fiscal consolidation given by FRBM (fiscal responsibility and budget management) laws.
Also it is simple because now there is no multiplicity of taxation.
Additional compliance burden
This is proved after reading table given below that compliance burden has heavily come down that to when there is single platform I.e. GSTN.
Compliance requirement for GOODS:
YES, for service providers (SP), compliance requirements have increased.
Earlier, SP was required just to file return with CG (central government). But now, SP is required to take registration separately in all states where he is operating and file separate returns in each state.
However, ES observes that only few SPs have pan India presence and their compliance capacity is quite high. And in future there might be a centralised approach.
What about Compliance burden on small traders?
Observe the below given table:
*Now if you have turnover up to 1.5 crores, you can have “presumptive scheme” which was earlier till 75lacs.
Anti profiteering measures
Another concern is raised over “Anti profiteering” measures and creation of a body for this matter. Allegations are that INDIA WILL AGAIN GO TO LICENCE RAJ ERA & PROFIT WILL BECOME A BAD WORD & IT WOULD CAUSE HARRASEMENT BECAUSE OF OVER ZEALOUS TAX ADMINISTRATION.
BUT, ES clearly reminds that there is a “SUNSET CLAUSE” also as per which the above provisions will expire in 2 years and CG has reassured that these provisions will only be sparingly used.
Revenue secretary to GOI (government of India) In a recent interview at DD clarified the whole picture.
How it will work?
If any consumer has any problem that a company is doing over profiteering, then s/he may complain to GST commission at state level. The commission will refer the matter to SCREENING COMMITTEE OF ANTI PROFITEERING at state level which will then analyse the matter. This mechanism will work if the company is of state level. But if company is at national level against which complaint is to be lodged then complaint has to be made to STANDING COMMITTEE at national level which will comprise of 2 central & 2 state government officials.
This committee in case see any merit in the case, will refer the matter to DIRECTORATE GENERAL OF SAFEGUARDS OR DGS. DGS will then call for a REPORT from the company. Then the case will move to APA (ANTI PROFITEERING AUTHORITY) which will serve a notice and opportunity of being heard to the company. APA is highly powered as it may pass the order that extra profit made be returned to all customers or where identification of customer is impractical then the money is to be deposited in a designated funds with the government.
Looking a complex process?
No as there is a fixed timeline within which action will be taken.
What about a GREAT CHEATIMG GAME GOING ON IN THE MARKET?
I WILL GIVE YOU here my own personal examples:
I went to a store to purchase some medicines and I asked them for “Pakka Bill”. But the person on the other side of the counter said that then she WILL HAVE TO CHARGE 28% GST. ??
I then opened “GST RATE FINDER” app provided by CBEC to show her that ON NO MEDICINE GST IS 28% RATHER IT WAS 5% ONLY. Also, I told her that MEDICINE ALREADY SHOW MRP I.E. MAXIMUM RETAIL PRICE (inclusive of all taxes) and so no further tax can be levied on that.
Next day I went to a photocopy shop and one man was about to pay his INR 2000 Bill which he insisted to pay by his DEBIT card. The shopkeeper was already registered under GST as evident from the REGISTRATION CERTIFICATE adorned on the wall proudly by the young man. As soon as he opened the tax invoice book, he was interrupted by customer asking if he going to charge GST? YES! 18%! He replied. Customer immediately asked him to forgo tax invoice and accept cash which he decided to withdraw from nearby ATM. Shopkeeper also CHEERFULLY accepted the proposal. I wondered after getting down from the shop, “why he accepted it?”. Then I realised what could be the planning. Now though shopkeeper got no OUTPUT TAX but he can set off Input tax credit paid by him against any other OUTPUT TAX. If some input tax set off is not available, it would be his cost. But still, he may be in profit. Why? Ha-ha.. well. Now he won’t record this receipt in his income books. And assume that he earned INR 1500 in above transaction (not a big deal for a service provider), he will save income tax @30% (on income more than 10 lacs) which amount to INR 450. A net benefit of INR 150. Besides, he earns customer loyalty.
Now this kind of evasion can be checked by INVOICE AND RETURN MATCHING through GSTN. But it is already proving cumbersome especially for the exporters and increasing their working capital requirements and reducing the competitiveness of Indian exports. It is so burdensome that Hon. Montek Singh Ahluwalia in his interview with Karan Thapar advised to delete this provision altogether from GST scheme.
Also, many companies were found to be not passing benefit of low GST rates to the customers and Mr. Adhiya rightly have called, especially to FMCG companies, to change their MRP rates accordingly or face anti profiteering measures proceedings.
To know about How GST is working, you may READ below REPORT published in The Indian Express on Nov. 28, 2017:
You may also check below link:
Clearly, moving forward, level of tax compliance will increase, economy will be more formalised, business decisions won’t be distorted by tax arbitrage as they would depend on sound economic principles, manufacturing activity will be boosted up as effect of inverted duty structure will be reduced and country will achieve high growth rates.
How it is taken up by industry?
CII (confederation of Indian industries) in a series of article published in THE HINDU clarified the position. I am giving a gist of that for you.
It will improve EASE OF DOING BUSINESS (EoDB) and enable TRADE FACILITATION AGREEMENT ratified by India. (Clearly, world bank’s EoDB rankings improved India’s ranking to 100 from 130 a year earlier out of 190 countries. Improved taxation system has contributed a big way in it.
See the table below:
- GSTN is integrating entire indirect tax ecosystem by acting as a common platform for all stakeholders.
- Government has shown unprecedented handholding including responding using social media.
- With inclusion of MSME, it is creating more transparency in supply chain and creating social transformation. It is increasing employment and affordable quality living for EWS (economically weaker sections).
- NCAER: it will increase GDP from 0.9-1.7% in next 3-5 years.
- It will decrease discretion in tax regime, litigation and increase FDI and competitiveness.
- It is reducing cost of capital goods because of simple tax credit mechanism and thus boosting CAPEX and make In India.
- GST rates of all commodities were broadly set as same as earlier so that there is no inflation in economy.
- Efficiency has increased in manufacturing which is biggest consumer of services.
BENEFITS TO MSME
MSMEs (which include self-funded proprietors, Self-help groups, khadi and village industries etc.) provides 25% employment, 40% industrial OUTPUT, 45% exports. Thus, it is critical to realise aspirations of a YOUNG INDIA. They will get benefit from GST in the following ways:
Market base of MSME will increase as now tax complexities of inter state trade will disappear and so original equipment manufacturers (OEMs) and corporates will procure more from MSME. Also, earlier tax system had lot of cascading effect and thus it promotes VERTICAL INTEGRATION rather than outsourcing and specialisation.
Now their products are more competitive as their logistics cost, working capital cost and raw material cost will come down and they will get more formal credit from financial institutions like banks as they will have reliable credit history and they will be able to easily become a part of global supply chain by becoming a part of thus taxation system.
Now to sell your product, tax compliance will become a business imperative.
Electronics will get a big benefit but no big benefit to leather and footwear.
BUT there are issues to be resolved:
There is increased documentation requirement and they have less managerial bandwidth and no digitally competent manpower. They need education, training and handholding.
Efficiency in supply chain
At present supply chain was broken. As per economic survey 2016-17, At present only 40% of travel time is spent in actual driving and 25% is wasted on multiple check posts as at present entry tax or octroi was levied at state or municipality level. India’s logistics cost (including stock out cost) is 3-4 times that of global benchmarks. Can our traders and manufacturers take benefit of global trade in globalised market to their full potential? Absolutely not! India has 18% logistics cost compared to 8% of China which is manufacturing powerhouse of the world.
It also increases LEAD TIME and so requires large amount of inventory to be maintained and so increase working capital cost. It also results in up to 15% wastage of fruits and vegetables produced and so cause loss to already poor farmers and decrease the prospects of Food processing industries. It also causes harm to the environment as lot of fossil fuel is burnt extra because of slow moving of traffic lanes. Because of this, traders are compelled to establish more warehouses across state borders to go near to consumer or supplier and change their supply routes which may be inefficient.
After GST, all check posts are dismantled and so logistics efficiency has increased by 40% because of increase in truck and lorry utilisation. It is also increasing the income of truck drivers. It is also reducing corruption which used to be there to let the lorry pass quickly or to go without tax in “BLACK” somehow. It will fulfil dream of ‘ONE NATION, ONE MARKET, ONE TAX’. But is it enough to create a common market?
Nandan Nilekani in his book ‘REBOOTING INDIA’ writes, ‘tax REFORM is only one step towards building a common market. It must also be accompanied by REFORM in several other sectors like farmers should be able to sell their produce freely in any market in the country; land reforms and better land titling systems should create a countrywide market for land; and a common national grid should allow for easy transfer if surplus electricity between producers and consumers so that all parts of the country can have a robust electricity infrastructure capable of supporting manufacturing units. Government has taken some efforts in this directions like e-NAM to create a unified AGRICULTURE market, working on smart meters and digitisation of land records in some states by linking them to Aadhar. Also, by development of inland waterways and projects like DMIC I.e. Delhi Mumbai industrial corridors, dedicated freight corridors, Sagarmala and Bharatmala projects, Indian market will be further unified.
Now Indian market would not be called QUASI OPEN as now along with free movement of labour and capital, there will be free movement of goods and services. It would not distort the economic decisions now.
Economic Survey 2016-17 mentions some additional benefits of GST:
It will increase financial Inclusion as small businesses will developed their credit rating.
It will boost direct taxes collection, improve tax to GDP ratio and tax buoyancy ( increase in taxes with increase in GDP)
GSTN is a real game changer which strengthens self policing culture with the mechanism of invoice matching and will eliminate F2F interaction with taxman by taking whole process digital. It will check corruption and leakage.
ISSUES WITH GST
6 rates need more convergence and rationalisation.
5 petroleum products, land and real estate, electricity, alcohol need to come within the ambit of GST. IT will bring down cascading further as at present input tax credit for these is not available and it adds to cost. Also, it will bring down corruption further by more formalization of steel, cement etc.
Note: Mr. Adhia pointed out that it is needed to see revenue trends of GST before making any decision on above items. Petroleum products make up 25% of tax revenue of GoI.
Also, at present real estate is partially covered in GST IN the form of WORKS CONTRACT. As if you take consideration even in part before construction, GST is leviable.
Tax compliance increases not because it becomes easy to comply with tax but because it becomes difficult to avoid it. Now, after demonetization, government has full data and they know how much money belongs to whom and who holds the title. Also with unique id of AADHAR and its linkage with PAN card, SIM cards, Digi locker and a number of government departments and services and finally taking entire compliance faceless by GSTN, IT WOULD BE VERY EASY FOR government to make entire profile of a person and to catch easily those who are trying to fool the system and make life of honest taxpayer difficult and puts a burden on low income salaried employee. These measures combined, will go a long way in creating a highly tax compliant society, a formal economy and a culture of honesty and integrity. TAX is paid to create a civilized society. Those who try to evade taxes should know that if our defence forces won’t be strong be it on land, marine, aerospace, cyberspace, they won’t be able to do their business so peacefully. Thus, defense is critical to commerce. If government will be forced to cut its social spending or not be able to enhance it when needed then we will continue to have 39% stunted children and only 20% GER (gross enrollment ratio) in higher education and so businesses wont be able to get productive workforce. No doubt worker in China has 3 times productivity then that of an Indian worker.
This taxpaying is a fundamental responsibility of every citizen to enjoy citizenship rights.
Let us create a strong NATION and then demand strong accountability from our representatives to hold them responsible to protect our fundamental rights.