Saturday, May 27, 2017

Impact of the GST Bill on the Indian Economy

As you are aware thanks to the news and social media frenzy in the past week, the government of India has declared that the new GST rules will come into effect from 1st of July onwards. In the previous article we had covered the basic questions you might have had about the GST bill. I had mentioned that the detailed impact of the GST bill on the Indian Economy would be covered in a separate article. So, here we are…

A Quick summary of the GST Bill:

The GST Council has finalised a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods, including luxury cars, SUVs and tobacco products, that would also attract an additional cess. Moreover, with a view to keeping inflation under check, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate. The cess is expected to provide additional resources to the central government to compensate states for losses incurred. This will be based on the compensation formula. 

Why the GST Bill may be Good News for India?

The introduction of Goods and Services Tax is step in the right direction in the field of indirect tax reforms in India. If there was one major complaint (Apart from corruption of course) from businesses that wanted to establish themselves in India (both local & foreign) was the complex tax structures and the multitude of state/central taxes that had to be paid by businesses. Without much clarity, these businesses were at the mercy of their auditors plus were always under the scanner of the tax man and could be penalized for tax non-compliance.

By amalgamating a large number of Central and State taxes into a single tax, it would alleviate cascading or double taxation in a major way and pave the way for a common national market. From the consumer point of view, the biggest advantage would be in terms of reduction in the overall tax burden on goods and services. Introduction of GST would also make Indian products competitive in the domestic and international markets. Last but not the least, this tax, because of its transparent character, would be easier to administer. However, once implemented, the system holds great promise in terms of sustaining growth for the Indian economy.

Impact of GST on Indian Economy

Below are some of the holistic benefits that can be expected because of the GST Bill.

Increased FDI

The flow of Foreign Direct Investments may increase once GST is implemented as the present complicated/ multiple tax laws are one of the reasons foreign Companies are wary of coming to India in addition to widespread corruption.

Growth in overall revenue

It is estimated that India could get revenue of $15 billion per annum by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. Over a period, the dilution of the principles may see that only part of this is accruing.

Single Point Taxation

Uniformity in tax laws will lead to single point taxation for supply of goods or services all over India. This increases the tax compliance and more assesses will come into tax net.

Simplified Tax Laws

This reduces litigation and waste of time of the judiciary and the assesse due to frivolous proceedings at various levels of adjudication and appellate authorities. Present law appears to be much worse and an amalgam of the bad parts of VAT/ ST/ CE.

Increase in Exports and Employment

GST could also result in increased employment, promotion of exports and consequently a significant boost to overall economic growth and factors of production -land labour and capital.

Other Benefits of GST:

  • Reduced tax burden on producers and fosters growth through more production. The existing double taxation system prevents manufacturers from producing to their optimum capacity and restricts growth. GST would take care of this problem by providing tax credit to the manufacturer.
  • Various tax barriers such as check posts and toll plazas lead to a lot of wastage for perishable items being transported, a loss that translates into major costs through higher need of buffer stocks and warehousing costs as well. A single taxation system could eliminate this roadblock.
  • This single taxation on producers and reduced wastage/inventory losses would also translate into a lower final selling price for the consumer.
  • Customers would know exactly how much taxes they are being charged and on what base (Because numerous taxes have been eliminated and the system is transparent now)
  • GST provides credits for the taxes paid by producers earlier in the goods/services supply chain. This would encourage these producers to buy raw material from different registered dealers and would bring in more and more vendors and suppliers under the purview of taxation.
  • GST also removes the custom duties applicable on exports. Our competitiveness in foreign markets would increase on account of lower cost of transaction.
  • The proposed GST regime, which will subsume most central and state-level taxes, is expected to have a single unified list of concessions/exemptions as against the current mammoth exemptions and concessions available across goods and services

All this sounds promising isn’t it? What are your thoughts on the GST Bill? Do sound off in the comments section.

Also, there will be subsequent articles published in the coming days elaborating the sector wise impact of the GST Bill. Hope you find them useful.

Friday, May 26, 2017

All your Questions about the new GST Bill 2017 in India - Answered!!!

The last few days have been quite turbulent for the social media ever since the government declared its intention that the GST Bill is finally set to become a reality. You may ask me what doesn’t trigger a social media frenzy in India these days. Anyways, coming back to the topic, there are a lot of news posts being shared on social media about GST being good or bad (depending on whether the person sharing the news is pro or anti BJP). The common man as always is lost for clarity on what is happening around him. So, I wanted to help clarify things for my blog readers.

Let me start off by apologizing for the delay. I should’ve written about it a week back but have been quick busy with work related commitments and couldn’t get to writing this article until today. The article is structured in a Q & A format to help answer your questions better. If you have any unanswered question after this article, pls feel free to comment.

Note: This is not a politically motivated article. So, pls refrain from posting comments that are political or abusive in nature or using derogatory language. Thank you.

1.  What is this new GST Bill?

The Indian taxation system is extremely complicated (Trust me – If you thought that the individual income taxation slabs & rules were complex, wait until you get into the shoes of a businessman) with numerous different types of taxes being payable to different entities like State government, Central government, Customs etc.  

This new GST Bill is aimed at reducing this complexity and make the lives of businessmen especially the Small & Mid sized enterprises or SME’s easier and their tax liabilities clearer. The new GST Slabs will replace a whole bunch of different taxes that exist.

2. What are these taxes that GST Replaces?

The GST replaces numerous different indirect taxes that are prevailing in India such as:
  1. Central Excise Duty
  2. Service Tax
  3. Countervailing Duty
  4. Special Countervailing Duty
  5. Value Added Tax (VAT)
  6. Central Sales Tax (CST)
  7. Octroi
  8. Entertainment Tax
  9. Entry Tax
  10. Purchase Tax
  11. Luxury Tax
  12. Advertisement taxes
  13. Taxes applicable on lotteries.

3. What are the GST Tax Slabs?

The Goods and Services Tax (GST) will be levied at multiple rates ranging from 0 per cent to 28 per cent. GST Council finalised a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods that would also attract an additional cess.

4. What are the Goods & Services that come in the 0% GST slab?

No tax will be imposed on items like fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, prasad, salt, bindi. Sindoor, stamps, judicial papers, printed books, newspapers, bangles, handloom, etc. 

Hotels and lodges with tariff below Rs 1,000. 

5. What are the Goods & Services that come under the 5% GST slab?

Items such as fish fillet, cream, skimmed milk powder, branded paneer, frozen vegetables, coffee, tea, spices, pizza bread, rusk, sabudana, kerosene, coal, medicines, stent, lifeboats etc.

Transport services (Railways, air transport) & small restaurants will be under this category because their main input is petroleum, which is outside GST ambit. 

6. What are the Goods & Services that come under the 12% GST slab?

Frozen meat products , butter, cheese, ghee, dry fruits in packaged form, animal fat, sausage, fruit juices, namkeen, Ayurvedic medicines, tooth powder, agarbatti, colouring books, picture books, umbrella etc. 

Non-AC hotels, business class air ticket, fertilizers, Work Contracts will fall under 12 per cent GST tax slab 

7. What are the Goods & Services that come under the 18% GST slab?

Most items are under this tax slab which include flavored refined sugar, pasta, cornflakes, pastries and cakes, preserved vegetables, jams, sauces, soups, ice cream, instant food mixes, mineral water, tissues, envelopes, tampons, note books, steel products, printed circuits, camera, speakers and monitors. 

AC hotels that serve liquor, telecom services, IT services, branded garments etc.  

8. What are the Goods & Services that come under the 28% GST slab?

Chewing gum, molasses, chocolate not containing cocoa, waffles and wafers coated with chocolate, pan masala, aerated water, paint, deodorants, shaving creams, after shave, hair shampoo, dye, sunscreen, wallpaper, ceramic tiles, water heater, dishwasher, weighing machine, washing machine, ATM, vending machines, vacuum cleaner, shavers, hair clippers, automobiles, motorcycles, aircraft for personal use, will attract 28 % tax - the highest under GST

5-star hotels, race club betting, cinema will attract tax 28 per cent tax slab under GST 

9. When will GST be implemented?

The implementation is proposed to start from 1st of July 2017

10. What are the things expected to be costlier or cheaper post implementation of GST?

According to experts, these items could become costlier:
·       Cigarette prices likely to go up as GST rate for tobacco will be higher than current duties
·       Commercial vehicles such as trucks will become costlier
·       Mobile phone calls may get costlier as service tax will go up
·       Textile and branded jewelry may become costlier

And these could become cheaper:
·       Auto: Prices of entry-level cars, two-wheelers, SUVs may fall
·       Car batteries likely to get cheaper
·       Paint, cement prices likely to fall
·       Movie ticket prices likely to fall as entertainment tax will come down
·       Electronics items like fans, lighting, water heaters, air coolers, etc. will get cheaper

11. What will be the impact of this GST implementation?

To start off, that will probably be a separate article in itself and a lengthy one too. So, am just going to give you a quick overview of what to expect in the short term.

In the short term it will probably fuel inflation because many of the commonly used items come in the 5-18% GST slabs and will pinch our pockets a bit. One surprising aspect of this GST is the fact that liquor hasn’t been included in the GST purview while tobacco has been included in the highest tax slab. I agree with the idea of excluding Petroleum as adding a GST on petroleum will add tremendous stress to our already strained economy but leaving out liquor does not seem to be a good idea. If tobacco is being charged at the highest slab in GST so should liquor (PS: This is just my opinion).

In the long run, since the GST will be applied at every step of value creation it will be very difficult for black money owners to participate anywhere in the value chain with the GST without accounting for all other transactions. The GST is estimated to provide an immediate boost of 0.9% – 1.4% of the GDP.

12. Can you show how this new GST will help a businessman?

Of course I can.

Mr. Kumar is a businessman who wants to start a business in Chennai. For this he needs various raw materials which have to be imported from China and will need to be brought to Avadi where he has his factory by road through various states. Once he gets down on the process of estimating his costs & taxes he is a little troubled.
First, he needs to pay a customs duty for importing the materials on top of the shipping charges. This is fine but there are a lot of other taxes which he seems to be unable to comprehend. See answer to question 2 to understand what those taxes are. The list itself is long and imagine Mr Kumar’s predicament in understanding all those and calculating his tax liability under each category. I am not even going to attempt to calculate Mr. Kumars tax liability and overcomplicate things because frankly I don’t understand them either…
Now, let us assume that the GST is set at 18%. Suppose that the manufacturing cost of a Product A is 100 and assuming a GST of 18% the total amount is Rs. 118. The next step of taxation would be when the Product is sold to consumers, let’s say at a price of 150. So the GST will charge another 18% on just the difference of Rs. 150 and Rs. 118 i.e. only 18% on Rs. 32 which is equal to Rs. 5.76. So the final price is Rs. 150 + Rs. 5.76 which makes Mr. Kumar’s as well as his Tax Auditors life easier doesn’t it? Not to mention the tax man who is happy to receive the Rs. 18 & Rs. 5.76 GST respectively.

What are your thoughts on this GST? Pls share them in the comments section in a civil manner. Thank you.

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