The
much awaited reform Goods and Service Tax Act 2016 will change the fundamental
of Indian Taxation. The state wise VAT, the central excise, the service tax,
all will be integrated into one legislation, known as Goods and Service Tax
Act, 2016 (‘GST Act 2016’). The GST Act 2016 has been for the first time made
public in June 2016 by the Indian Government. The government is planning to
introduce the Act w.e.f. 1st April, 2017 and proposes to pass the
122nd Constitutional Amendment bill, 2014 in the upcoming monsoon
session of the parliament. By amalgamating a large number of Central and State
taxes into a single tax, it would mitigate cascading or double taxation in a
major way and pave the way for a common national market.
The
framework of GST is characterized by a marked shift from the present origin
based taxation to that of consumption based. It is proposed to be levied on a
wide base of goods and services and is likely to subsume a majority of existing
taxes – excise duty, service tax, VAT, Central Sales Tax (CST), purchase tax,
octroy, local body tax etc. Only few services of public importance are kept
outside the purview of GST. The regime is expected to have an equally conducive
regulatory effect on Foreign Direct Investment (FDI), allowing foreign
manufacturing companies to also be able to reap benefits and thereby, steadily
build confidence in investing in India. The transition to GST may change the
way business is done in India and is widely expected to boost the country’s
economy.
Background
The
Constitution (122nd Amendment) bill, 2014 was introduced in Lok
Sabha on December 19, 2014 and was passed in the House on May 6, 2015. Further,
it was referred to a Select Committee of Rajya Sabha on May 14, 2015. The Bill
amends the Constitution to enable Parliament and State legislatures to frame
laws on the imposition of the Goods and Service Tax (GST). Consequently, the
GST subsumes various central indirect taxes including the Central Excise Duty,
Countervailing Duty, Service Tax, etc. It also subsumes state value added tax, octroi
and entry tax, luxury tax etc.
The
idea behind GST is to subsume all existing central and state indirect taxes
under one value added tax, which will be levied on all goods and services. No
good or service is exempt, and there is no differentiation between a good or
service, whether as an input or as finished product. Under GST, tax paid on
inputs is deducted from the tax payable on the output produced. This input
credit set off operates through the manufacturing and distribution stage of
production. The tax is collected only at the place of consumption. This design
addresses cascading of taxes.
“Implementation of GST in India
will integrate the existing line of taxes like Central Excise, Service Tax,
Sales Tax, Value Added Tax etc. into one tax i.e. GST. Thus it will help to
reduce or eliminate the multiple taxes currently being levied on products and
services.”
Key Features
GST
will create a single, unified Indian market to make the economy stronger. The
basic aim of GST is to benefit the consumers as well as the Government, thus
creating a win win situation for both. Some of the important features are-
The GST shall have two components: one levied by the
Centre (Central Goods and Service Tax) and other levied by States (State Goods
and Service Tax).
Rates for Central GST and Sate GST would be prescribed appropriately,
reflecting revenue considerations and acceptability. This dual GST model would
be implemented through multiple statutes. However, the basis features of law
such as chargeability, definition of taxable event and taxable person, measure
of levy including valuation provisions, basis of classification etc. would be
uniform across these statutes as far as practicable.
Ending of Multiple Layer of taxes – Implementation of GST in India
will integrate the existing line of taxes like Central Excise, Service Tax,
Sales Tax, Value Added Tax etc. into one tax i.e. GST. This will help in
avoiding multiple taxes currently being levied on products and services.
Alleviation of Cascading taxation – Under the GST regime, the final
tax would be paid by the consumer of the goods/services but there would be an
input tax credit system in place to ensure that there is no cascading of taxes.
GST would be levied only on the value added at every stage, unlike the present
scenario wherein tax is also required to be paid on Tax in a few cases i.e. VAT
is payable on Excise Duty.
Development of National Economy – With the introduction of a
uniform taxation law across states and different sectors in respect to indirect
taxes under GST, would make it easier to
supply goods and services hassle-free across the country. This will not only
help in removing economic distortions, promote exports and bring about
development of a common national market but will also enhance tax – to – gross
domestic product ratio and thus help in promoting economic efficiency and
sustainable long term economic growth.
Increase in voluntary compliance – Under the GST regime, the
process will be simple and articulate with a lessor scope for errors. As all
the information will flow through the common GST network, it would make tax
payment and compliances a regular norm with lessor scope for mistakes. It will
only be upon the payment of tax, that the consumer will get credit for the
taxes they pay on inputs. This will generate an automatic audit trail of value
addition and income across the production chain, creating a unified base of tax
potential that can be tapped. Thus the GST model will do away the need of the
current patchwork of indirect taxes that are fractional.
Reduction in litigation – Taxation under GST will reduce
the litigation on account of clarity regarding the jurisdiction of taxation as
against the present structure where there still exists an uncertainty regarding
jurisdiction of taxation by the Centre and State. In the GST regime, with a
single tax law in place, there would be smooth assessments as compared to the
present multiple assessments in different tax laws.
Efficient Administration by the Government - Presently, on account of
multiplicity of taxes and their cascading effects, lack of integrated network,
the administration of indirect taxes is a mammoth task for the government which
also adds to the compliance & administration costs. Under the proposed GST
regime, with unified tax rate, simple input tax credit mechanism and integrated
GST Network, information would be readily available and administration of
resources would be easy and efficient for the Government. There would be a
single tax, reduced errors and litigations, thus resulting in reduced
administration costs too.
Will act as a Tax Booster for the Government - With a wider tax base, minimum
floor rates, facility of seamless credit, the Goods & Services Tax would
prove to be an efficient tax booster for the government. With ease of
compliance and integrated network data, tax collection would be much easier for
the government.
GST Sectoral Impact
The
impact of GST shall be on almost all the sectors of the industry. However,
there shall be certain sectors which will be impacted more as compared to
others. Following are the key sectors that may be impacted strongly by GST,
with respect to their supply chain models.
Pharmaceuticals
Present Scenario – Many pharmaceutical companies have pan India
presence owing to the Clearing and Forwarding Agent (CFA) model of their supply
chain. This model is applied to mitigate the CST cost applicable on interstate
sale of goods, the input tax credit of which is not available at present. The
structure has created procedural hassles in terms of non-availability of
statutory documents on time and the restriction on free movement of goods
across different states, thus giving rise to the procedural disputes with tax
authorities in different states.
GST Scenario – under the Integrated Goods and Service Tax (IGST)
there will be availability of input tax credit, eliminating the need of CFA
agent in each state. This shall help in rationalizing the distribution centers
in the supply chain. As GST shall be applicable to branch transfers, the issue
of obtaining and issuing statutory forms could be done away with, thereby
reducing litigations.
Further,
companies may have to relook at their pricing policy from key perspectives,
such as differential excise duty structure for active pharmaceutical
ingredients and active formulations, and the current practice of MRP basis to
levy tax.
FMCG
Present Scenario – The model in FMCG sector is same as
of the pharmaceutical, with depots across states to mitigate CST. Procurement
of inputs is generally an interstate transaction, leading to the CST levy,
which in turn increases the cost of procurement, since diverse products are
manufactured in the sector.
GST Scenario – with the availability of IGST credit on interstate
procurements under GST, there is possibility of reducing the procurement cost
and companies can accordingly rationalize their pricing policy.
Telecom
Present Scenario – The supply chain network comprises of branch
warehouses, normally spread in each state/circle of the telecom operator. The
industry incurs significant cost in acquiring infrastructure facilities like
towers and telecommunication equipment. The VAT applicable on such equipment is
not available as input tax credit against the service tax payable on services
provided by telecom operators. Dual taxation in certain states is a dampener
for this fiercely competitive sector.
GST Scenario – with full input tax credit being proposed,
operators can expect reduced cost of procurements. The current service tax
payable on output services is expected to increase. With telecom services being
an important utility for the end customer, operators may need to look into their
pricing, so as to avoid passing on the increased tax cost to the end customer.
Automotive
Present Scenario- In the automotive industry there are several inputs
used in manufacturing of automobiles that are subject to a lower VAT rate of 4
to 5 percent, as compared to VAT rate on the final product. Manufacturers
prefer their ancillaries to be situated in the same state so as to not only
help manage the supply chain cost, but also in mitigating the extra cost of CST
on which no input tax credit is available.
GST Scenario – With full input tax credits on interstate
transactions being made available under GST, automobile manufacturers can scout
for alternative options for sourcing ancillaries, wherein the supply chain cost
is not the key determinant. The additional levies can be subsumed under GST and
should be of value to the end customer.
Real Estate
Present Scenario- In this sector the tax is levied aggressively, with
multiple taxes being levied at various levels, such as service tax, VAT, stamp
duty etc. Non-availability of input tax credits has led to a cascading tax
impact, which directly affects the end customer.
GST Scenario – The GST regime is expected to resolve many of the
issues inherent in this sector in terms of multiple taxes and availability of tax
credits. However, in this industry both goods and services are used for
providing the end product (known as works contract), thus leads to double
taxation i.e. VAT and service tax of some portion of the consideration.
Conclusion
For
a economy like India which is still a developing one, it is imperious to be
globally more competent and utilise its resources efficiently. The taxation
policies should be defined in such a manner so as to maximise the economic
efficiencies and minimise distortions & impediments towards resource
utilisation, capital formation and international trade. In totality,
implementation of comprehensive GST regime in India is expected to lead to
efficient allocation of factors of production thus, leading to economic gains,
increased exports, enhanced economic welfare and returns to factors of
production viz, land labour cost and capital.
The
implementation of GST in India will not only contribute to the nation's GDP and
develop a Common National Market across borders but will also impact various
business areas like pricing, costing, margins, supply chain management, tax
compliances/incentives, IT systems etc. Also the GST reform is likely to serve
as a crucial enabler for the ‘Make in India’ campaign. With a importance of
state boundaries and the cascading impact of taxes diminishing in making supply
chain decisions it can serve as an opportunity for a company to carve a new and
an efficient operating model to give it that distinctive servicing advantage.
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