In this blog post, Debiyanka Nandi, a B.A. LLB student at Department of Law, Calcutta University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the benefits of GST on various industries.  

Introduction

A tax may be defined as a “pecuniary burden laid upon individuals or property owners to support the Government, a payment exacted by legislative authority”. A tax “is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority”. Taxes consist of Direct Tax or indirect Tax, and may be paid in money or as its labor equivalent (often but not always unpaid labor). India has a well developed taxation structure. Taxes are imposed by the Central Government, State Government and some minor taxes are imposed by the local authorities like Municipalities in India. The authority to levy taxes is derived from the Constitution of India which allocates the power to levy various taxes between the Central and the State. Article 265 serves as a restriction to the power of central and state government to make tax laws, which states that “No tax shall be levied or collected except by the authority of law”. Therefore, each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature. Any tax which is imposed by the government and is not backed by a law or is beyond the power of legislative authority, is struck down as unconstitutional.

 

Types of Taxes in India

In India various kinds of taxes are found.  In India, taxes can be either direct or indirect. However the types of taxes depend on whether it is levied by central, state or municipalities. The most known tax imposed by the local municipal authorities is the Entry Tax or Octori tax.

Direct Taxes

Direct taxes are so named because they are directly paid to the union of India. Some of the direct taxes imposed by the central government are income tax, corporation tax, security transaction tax etc.

Indirect Tax

Indirect taxes are levied on some specific taxes and particular goods. It is not levied on any particular person or individual. Usually indirect taxes in Indian republic are a complex procedure that involves laws and regulations, which are interconnected to each other. Some of the indirect taxes are excise duty, custom duty, sales tax, value added tax, etc.

What is GST?

GST stands for Goods and Service Tax. The Goods and Service Tax Bill or GST Bill is officially known as the Constitution (One Hundred and Twenty Second Amendment Bill), 2014 which is to be implemented in India from 1st April, 2017. The purpose of this act is to merge the indirect taxes in India into a single taxation system. This is one of the most important reforms brought in Indian economic system which would affect us all. The taxes which will be submitted into GST include Central Excise Duty, Service Tax, Additional Custom Duty, and state-level Value Added Taxes.

The introduction of goods and service tax is a significant step in reforming indirect taxation in India. The amalgamation of several central and state taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of tax would lead to a better working of administration. From the consumers point of view the biggest advantage is the reduction in overall tax burden.  By introduction of GST movement of goods from one to another has become hassle free and much easier. Now there is no need to wait at state borders for hours to pay taxes and also much less paperwork burden. The major changes that GST brought in India is that the tax rate under GST may be nominal or zero rated for the time being. The central government has assured the states to pay compensation for any loss of revenue incurred upon them from the date of introduction of GST for a period of five years.

Total tax collection in India (direct and indirect) current is Rs 14.6 lakh crore of which almost 38% comprises of indirect taxes. With the introduction of GST the indirect tax system in India is expected to evolve.

Objectives of GST:

• To  ensures that input credits are available across the value chain
• To  make the taxation system much more simplified
• To minimize double taxation and cascading effect of taxation
• To harmonizes tax based laws and administrative procedure across the country
• To minimize tax rate
• To prevent unhealthy competition between the states
• To increase tax base and compliances

Impact of GST on various sectors

The ambit of GST is wide. Almost all the sections of society will face the impacts GST. Impact of GST on some of the sectors is as follows:-

Automobiles:

The effective tax rate in this sector ranges between 30-47 percent. On implementation of GST the tax rate is expected to oscillate between 20-22 percent. It is expected to reduce the overall cost for the end user by 10 percent. The transportation time and overall cost will reduce as the goods will be transferred from one state to another easily in a much more hassle free manner. In addition to this, the cost of logistic and supply chain inventory will be reduced by 30-40 percent. Thus in the long run GST is expected to have a positive impact on automobile sectors. The key beneficiaries would be Maruti Suzuki, Hero Motocorp, Bajaj Auto, Eicher Motors, and Ashok Leyland.

Consumer durables:

The current tax rate for the sector ranges between 7-30 percent. GST will benefit the companies which have not availed tax exemptions in the past. It will reduce the price gap between organized and unorganized sectors the logistic cost across the operational and non operational segments will be curtailed thus improving the operational profitably by almost 300-400 bps. The 7th pay commission is also expected to boost demand and fund inflow in this sector by the end of the year. The impact of GST on this sector is expected to remain neutral or negative by the end of the year especially for companies who enjoy tax exemption or fall under concessional tax brackets. The key beneficiaries would be CGCE, Havells, Voltas, Blue Star, Symphony, Hitachi and Bajaj Electronics.

Furnishing and room decor:

The effective tax rate for this sector ranges above 20 percent currently. By implementation of the GST, paints and other chemical companies will be benefitted from lower tax rate. Effective tax correction practices under GST will narrow the gap between organized and unorganized sector. Overall cost and competitiveness among manufacturer of products like cement, plywood, sanitary ware, etc, will be curbed. The key beneficiaries would be Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel, BASF India, Pidilite, HSIL, Cera Sanitary ware, Greenply, Greenlam industries, H&R Jhonson ( prism cement), and Kajaria Ceramics.

Telecom Companies:

Telecom industries are now subjected to service tax of 14 percent. By implementation of GST the tax rate is expected to increase to 18 percent. The telecom companies may pass the burden of increased taxes on the post paid subscribers. The capex cost of the companies is expected to be lowered by the availability of input tax credits. The effect of GST on telecom companies is negative as it may not be able to pass the burden of taxes upon the consumers.

IT and ITeS Sector:

The IT industries are now subjected to an effective tax rate of 14 percent which is expected to increase to 18-20 percent by implementation of GST. The huge amount of revenue which the company earns from export will continue to be exempt under GST. Litigation around taxability of canned software will probably end under GST regime. Overall effect of GST is expected to be neutral to slightly negative.

Textiles and Garments:

The effective tax rate for this sector currently ranges between 6-7 percent regarding which there is no clarity whether a lower rate will continue for readymade garments. The companies will be negatively impacted in case of high output tax rate. Several exports companies may also avail drawback benefits. Arvind, Raymond and Page Industries are expected to be most impacted.

Pharmaceutical Sector:

This sector enjoys tax rates based on location. The effective tax rates for most of the companies are much lower than the statutory tax rates. The concessional tax brackets for this sector are expected to continue. The existing tax exemptions are expected to continue as well unless the exemption period expires thus making it difficult to bring forth new exemptions in future. GST is also expected to address inverted duty structure and lower logistic cost for this sector. In overall view this sector will be neutrally impacted by implementation of GST.

Media:

The effective tax range for the broadcasters is 14-15 percent and that for the DTH providers is 20-21 percent. By implementation of GST an overall rate of around 18-20 percent will apply which is lower than the current tax rates for DTH and higher than the higher tax rates for broadcasters. The news and print sector is exempted from all indirect taxes, after implementation GST we can expect concessional rates to be introduced in this sector. Thus we can see that the DTH providers will be benefitted whereas the impact of GST on broadcasters will be negative. The impact of GST on news and media sector is neutral.

Conclusion

Under the proposed GST effective tax rate on goods will decline. A significant proportion of goods are not subjected to this tax. The following do not fall in the ambit of GST:

• Petroleum products
• Entertainment and amusement tax
• Tax on alcohol and liquor consumption
• Stamp duty, custom duty
• Tax on consumption and sale of electricity

In spite of the advantages brought about by GST, there are lots of problems faced in implementing it. The implementation challenges faced by implementing GST are as follows:

• Lack of adaptation
• Lack of trained staff
• Double registration can increase compliance and cost
• Lack of clear mechanism to control tax evasion
• Hard to estimate the exact impact of GST

Indirect taxes in India have driven businesses to restructure and model their supply chain and system owning to multiplicity of taxes and costs involved. With hopes that the GST will see the light of the day, the way India does business will change forever.