Will GST untangle India’s tax regime? How the new system might impact consumers and businesses

In a week’s time, the country will embrace a new indirect tax system, the Goods and Services Tax (GST), which will dismantle state barriers to create a single national market, giving a boost to a host of economic and development goals. Lofty goals apart, the switch to a single tax from 1 July is set to throw up some surprises for consumers and businesses.

Consumers will for the first time get a measure of the total central and state taxes levied on a product, ending a host of hidden and embedded taxes they paid so far.

Businesses will get to know if the increase in the headline tax rate on many items will actually be offset by the extra tax credits on raw materials and services, as claimed by the government.

Headline GST on telecom services, for instance, has gone up to 18% from the 15% service tax rate at present. This has led to concerns about a possible increase in telephone bills, although the government has stressed that tax credits available from the service tax paid earlier on spectrum payments will more than offset the rate hike.

“The jury is still out on the impact of GST on cost of telecom services as there is a lot of fine print. Once the new regime kicks in, we will get clarity based on the billing,” an executive with a telcom service provider said on condition of anonymity.

The new indirect tax system is also set to test how digital savvy small traders are when it comes to filing tax returns.

The government, keen to ensure that GST is not inflationary, is in the process of setting up an anti-profiteering authority to prevent firms from passing on any reduction in tax burden to consumers.

Discount & concerns

On their part, producers of items such as apparel and shoes, which have a seasonal market, are offloading their entire summer stock with discounts before July 1.

Harkirat Singh, managing director, Woodland Worldwide, said his company has kicked off its end of season sale ahead of GST’s introduction.

“We are trying to liquidate our summer merchandise which we do not want to carry forward to coming months,” he said, adding that most of Woodland’s footwear falls in the 18% slab, which may translate into a marginal increase in cost. “However, we have decided to absorb this cost and not to pass it on to consumers,” Singh said.

While most tax experts ruled out the possibility of supply disruptions, an industry executive, who spoke on condition of anonymity, said that some firms may optimize their stocks in the run-up to 1 July.

The government has already clarified that if businesses and traders produce documents for the taxes paid under the current system, full credit for such payments will be available under GST. Where documents for excise or value added tax payments on raw material are not available from a supplier, businesses and traders will get 60% credit for the taxes paid on raw materials. This, the authorities believe, will prevent firms from reducing supplies in the weeks before the roll out.

“Businesses are not changing their inventory and supply patterns but at the retail level, traders may be destocking in the run-up to GST and restocking in the months immediately after the transition,” said Anil Rai Gupta, chairman and managing director at lighting and electrical appliances company Havells India Ltd.

Praveen Khandelwal, national secretary general of Confederation of All India Traders, a trade body, said it is business as usual for traders ahead of GST, and added that consumers need not worry about any supply disruptions.

A tale of compromise

Rolling out GST on 1 July is the result of more than a decade of discussions, tussles among states, and between states and the Union government, instances of give and take, lobbying and compromise. The highlight of the reform is the creation of a federal tax institution, the GST Council, which has state ministers as members and the Union finance minister as chairman and gives every state a say in the country’s indirect tax policy.

A seamless market of over a billion people and eight million registered indirect tax assessees paying a single tax for goods and services is likely to go a long way in achieving what the government has been trying to do through various measures—promoting the manufacturing sector, boosting exports, creating more jobs, improving the investment climate, cutting down tax evasion and lowering the compliance cost to businesses.

According to Ansh Bhargava, a senior consultant at Taxmann.com, a company that assists taxpayers, the single market concept is akin to signing a free trade agreement between different states of India. “The GST regime seeks to break the barriers that currently exist between states and make movement of goods between different states easier,” said Bhargava. Elimination of the tax-on-tax effect by providing input tax credit will lead to lower costs and make Indian products competitive in the global market, he said.

Besides transparency, consumers are likely to benefit from lower tax burden on some products and services. Lower indirect taxes will also address the regressive nature of this levy which affects the rich and the poor alike, unlike taxes on income which is based on an assessee’s ability to pay.

For businesses, elimination of multiple levies and creation of a single market with fewer tax rates and fewer tax exemptions will improve the ease of doing business and reduce avoidable litigation. A large part of the tax litigation in India is around tax exemptions.

Good, but not the best

However, the GST that is ready for implementation is far from ideal. The guiding principle for the government while trying to secure consensus amid competing interests of various stakeholders was that it is better to have a good GST instead of waiting endlessly for the best one. From the concept of an ideal GST of low tax rate with few exemptions initially considered, the final form has four rates—5%, 12%, 18% and 28% for goods and services—with some items in the highest slab attracting an additional cess. Most of the items fall in the 12% and 18% slabs depending on the current tax burden on them.

Five hydrocarbons—crude oil, petrol, diesel, natural gas and jet fuel—are temporarily kept out of GST, while liquor has been constitutionally kept out of the new tax regime. That was a compromise the Union government had to accept as states wanted the items on which tax collection is the easiest to be out of the new tax regime which gives little liberty to individual states to revise rates on their own.

The GST Council, chaired by Union finance minister Arun Jaitley, will consider inclusion of hydrocarbons in the new tax regime once state revenues stabilize after GST implementation. Nearly 40% of state revenues are estimated to be from petroleum products.

As of now, the Centre taxes production of goods and supply of services, while states get to tax sale of goods but not supply of services. In GST, this barrier is removed and both the Union and state governments get to tax the entire value chain of goods and services, increasing compliance, explained V.S. Krishnan, adviser (tax policy group) at EY India and a former member of Central Board of Excise and Customs.

There is still some work to be completed. One among them is to clear rules regarding e-way bills, an electronic permit for movement of goods. According to Prashant Deshpande, partner at Deloitte Haskins & Sells Llp, the e-way bill rules need to be very practical and minimize compliance burden. Also, states need to ensure that border check posts are eliminated.

GST in the current form is a diluted one in comparison to the original concept, but experts welcome its roll out. “Introduction of GST is a very good start. Reforms, however, do not end here. Certain features can be further streamlined,” said Deshpande