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The most
significant tax reform for India will likely have its fair share of glitches
post implementation. Agility on part of businesses and governments will be
needed to navigate through the initial phases of uncertainty. The economy
stands to gain over the long term as efficiency gains and higher government
revenues translate into higher growth potential. Job creation will remain a
concern as the unorganized sector shifts towards the organized sector.
The Goods
and ServicesTax (GST) is a destination-based indirect tax that will subsume all
current indirect taxes being levied—both by center and the states—except basic
customs duties and a few state and local taxes.The new taxation system under
GST is aimed at making a simplified indirect taxation regime which has
pan-Indiauniformity thereby removing inefficiencies arising from taxing the
same good multiple times at different rates across each state.
The GST aims
to remove the cascading effect of various central and state levies. Alcohol for
human consumptionand electricity are outside the purview of GST while levy on
petroleum products (crude, diesel, petrol, natural gas,and ATF)will be
recommended by the GST Council at a later data.
GST Council: Apex body for decision making
GST council
is the top constitutional authority for GST, which is created to mirror the
federal structure of the country, with the Union FinanceMinister as the
Chairperson, a minister from a state government as the Vice-hairperson and all
state finance ministers and the Union Minister of State (Finance)as members.
The States have 2/3 weightage while the centerhas 1/3 weightage. Any decision
needs support of at least 75% of the councilwith a quorum of 50%. It is the
prime decision making body for GST with the power to make recommendations on
rulesand laws, rates, exemptions and thresholds, etc.
Neutral to negative impact as uncertainty-led risks
high in the short term
The
short-term impact of GST could be neutral to negative for the broader economy.
Production processes will likely take some time to align with the new framework
as firms adjust to the input tax credit system and get a handle on the working
capital requirements too. Micro and small enterprises could see costs increase
due to higher compliance and a shift towards the organized sector. We would be
cautious on economic growth for next one to two quarters. The GST rate
structure will be neutral to marginally disinflationary for CPI inflation We
estimate CPI inflation to be lower by around 20 bps on an average due to GST
rates.
Positive implications likely in the medium to long
term
The economic
benefits in the medium to long term would be from two major factors: (1)
efficiency gains from a simpler tax system, more productive business
operations, and creation of a one nation market for production and consumption,
and (2) higher government revenues due to expansion of the tax base as
compliance increases and unorganized segment shifts to the organized segment.
However, we note that unorganized sector employs a majority of the labor force.
With the unorganized sector shifting to the organized sector, a significant
labor absorption capacity that currently exists may get eroded. This can
compound the already chronic problem of job creation in India. Given India’s
economic structure and GST framework, drawing quantitative conclusions from
other countries’ experiences would be unfounded.
Post-implementation challenges: proof of the pudding
is in the eating
Challenges
will be more evident after the implementation, but it is important to recognize
a few issues which may crop up. The primary concern will be glitches in
seamless tax credit which can have a negative effect on the working capital
requirements of the firms. Further, the industry could have concerns on the
limited number of GST Service Providers (GSPs) presently approved and the
reliability of the linkage between the firms and Application Service Providers
(ASPs) in terms of security and network (Exhibit 4). Some concerns will also be
on the ability of micro and small retailers to be able to submit online returns
which the GST regime mandates to be done on a monthly, quarterly and annual
basis (Exhibit 5).
Companies’ challenges: short-term hitches will be the
focus for now
Exhibit 6
summarizes the key changes and our understanding of the issues and challenges
of the sectors. Most challenges now revolve around compliance, infrastructure,
and logistics of the GST system which would essentially demand an on-the-go
course correction, if any. Over the next few quarters as the dust settles on
short-term glitches, the business will move to resolve the more structural
issues of reforming business models and gaining efficiency.
Rate structure:
Dual control and multiple rates
The
current GST rate structure is a combination of both central and state
government having
a share in
the tax collections. There are three types of taxes—Central GST and State GST
for
intra-state
transactions and IGST (Integrated GST) for inter-state transactions.
The GST
Council has decided the tax rates while trying to keep the rates closer to
present effective rates for most commodities and services. Tax rates in GST
will be kept under four specific slabs—5%, 12%, 18% and 28%—while certain basic
goods and important services are exempt from GST. Luxury and sin goods, as
identified, will attract additional cess over the peak rate of 28%. Precious
and semi-precious stones and precious metals
would attract a GST rate of 3% while rough diamond would have a GST rate
of 0.25%.The cess will be used to compensate states for any revenue loss
incurred due to GST implementation for five years after implementation. The
loss is to be calculated with FY2016 as the base year and an annual growth
of14% over the period of compensation. summarizes the relevant tax base growth
rateover the last few years across various states.
GST will
apply to businesses having a turnover exceeding `2 mn(`1 mn for special
category
states).
In effect it would be a relief for certain traders and service providers which
had a
threshold
of `0.5 mn in most states’ VAT and `1 mn for service tax. However, for
manufacturing units this would be a reduction in the threshold limit as they
enjoyed central
excise
duty exemption till `15 mn of turnover. As decided by the GST Council, states
would
have
administrative control over 90% of tax payers having a turnover below 15 mn and
center
would have administrative control over the remaining 10%.
Taxpayers above this
threshold
would be divided equally between central and state tax administrations.