Prime Minister Narendra Modi was in his element when he congratulated the country on the passage of the much-touted Goods and Services Tax (GST) Bill in the Upper House of the Parliament, claiming that the new tax regime will rid the country of tax-terrorism. The tax regime which was proposed about a decade back as the panacea that would clean up the messy and complex indirect tax structure of the country, is expected to give India's GDP a fillip, apart from boosting exports. "Expected" is the word. While GST has become popular as a 'One Nation-One Tax' formulation, the realities of implementation may be more complicated than political negotiations in the Parliament. Truth is GST, for which the ruling administration has set a go-live date of April 1, 2017, is in no way a one-tax rule. As things stand, the Centre has agreed to subsume excise duty, additional excise duty, service tax, countervailing duty, surcharge and cess, and central sales tax into the waiting arms of GST. The States have agreed to give up VAT (sales tax), entertainment tax, luxury tax, taxes on gambling, octroi and entry taxes, cess and purchase tax. GST will thus replace all of these taxes. The all-important tax rate though remains to be agreed upon. The Dollar Business analyses the impact of GST on the Indian economy and its foreign trade.
TDB Intelligence Unit | September 2016 Issue | The Dollar Business
Await of more than a decade came to an end on August 3, 2016, when the 122nd Constitution Amendment Bill, 2014 (popularly known as GST Bill) was passed by the Upper House of the Parliament of India. This is apparently the country's biggest tax reform since Independence. Some achievement therefore for the Indian democracy. The new tax regime, which subsumes all indirect taxes such as sales tax and excise tax, is expected to bring down tax rates in India, while converting the country into a big single market. In short, now, seamless flow of goods and services will occur across 29 states and 7 union territories!
Many believe the landmark Goods and Services Tax Bill (GST) passed by the two houses of the Parliament – after years of back and forth by the ruling party and main opposition (both the present ruling and main opposition parties have supported and opposed the Bill depending on whether they were in power or in the opposition) – is a key step that would catapult India into the big league in global supply chain. The implementation of the Bill is expected to ease India's cumbersome tax system, help goods move seamlessly across state borders, curb tax evasion, improve compliance, increase revenues, spur growth, boost exports, and attract investments by improving ease of doing business in India.
In short, GST when implemented, is expected to perform miracles. But, can it really? And considering that the Bill still needs to be ratified by at least 13 more state legislatures (over and above the three states Assam, Bihar and Jharkhand, which had already passed the bill, as on August 22, 2016) before the President of India can notify the GST Council to decide on the new tax rate and other issues with respect to GST, will it be a easy journey for the GST to the finish line?
India is by no means the first country to experiment with a unified tax regime. 160 countries already have some form of GST or a value added tax. What makes GST in India special is that as opposed to a federally administered regime, the Union and state governments will jointly administer India’s dual GST. This means it will be a set of many different taxes – a GST for each of the 29 states and two union territories (SGST), a Central GST (CGST), and an Integrated GST (IGST; which will be a combine of CGST and SGST on inter-state supplies of goods and services). That surely is not as unified as it seems.
Interestingly, India will be one of the very few countries with a dual GST regime alongside Canada and Brazil. The all-important rate is yet to be finalised, with the final standard rate possibly lying between 15% to 27%, though 18% is the rate that seems to be gaining a sort of consensus amongst pundits. The problem though is that the pundits won’t decide the rate!
GST rate will be decided in the coming months by a GST Council that will prise the Finance Minister with a representative from each state government. As such it will be negotiated amongst the Union and state governments that will jointly administer the GST regime. It will still remain complex and difficult to implement, but would surely make life easier for businesses by cutting down, or rather combining, the many indirect taxes that companies file in India.
Foreign media has called GST one of the world’s most complex tax reforms that needs to be supported and serviced by state-of-the-art technology. And Infosys, the Indian software giant, has already started building a massive electronic infrastructure – a GST portal (GSTP) – where taxpayers can register, make payments and file returns. It is expected that some 7.5 million businesses will be covered by the tax. But then there are several questions that have been doing rounds since the day the Bill was passed in Rajya Sabha. What will really be the impact of GST on India's manufacturing and service sectors? What will be a realistic timeframe for its implementation? How difficult will the implementation process be given the dual nature? What would be an ideal timeframe by which benefits will be realised? And above all, what will be the impact on exports from key sectors?
Business Made Easy
One factor where the industry has clearly been in consensus is that GST being a destination based tax (where the tax is not applied at the point of production but at the point of supply or consumption), will make life easier for businesses in India. Companies will not have to file tax returns with multiple departments, but there will be just one web-based form to file tax returns. The country will finally become one common market, with uniform pricing across states, and optimal allocation of resources, making our goods more competitive. "Undoubtedly the most significant reform since the liberalisation in 1991, GST will transform India's economic landscape. Unifying the $2 trillion economy and its 1.3 billion people under a uniform tax code, makes our country one of the most attractive destinations for business. I am confident that this game-changing legislation will propel India into a $20 trillion economy in the decades to come,” says Anil Agarwal, Chairman, Vedanta Group.
Apart from this, there will be a very strong positive impact on the logistics sector. There is no one in India who has not seen the serpentine queues of goods carrying vehicles standing at inter-state check posts for inspection and payment of taxes. Even Shaktikanta Das, Economic Affairs Secretary, Ministry of Finance, GoI, is on record saying that trucks on an average spend 48 hours stranded at different check-posts every trip. The GST in ‘one fell swoop’ will remove these barriers, thus making India a preferred destination for business. "GST will revolutionise logistics with unified and simplified structure versus multiple taxes at various levels. It will lower the inventories and working capital, reduce documentation, improve asset utilisation, ensure higher turnaround time and efficiencies. We expect the industry to move away from pure vanilla warehousing needs to contract logistics," Prakash Tulsiani, Executive Director & COO, Allcargo Logistics, tells The Dollar Business.
Not so Easy
Sounds good. But then it won't be an easy run to the finish line for GST. And the reason is simple! The dual nature of India’s GST regime is expected to make implementation a complex problem, and rob off some of the key features of ease of doing business.
Canada and Brazil, both have a federal administrative structure similar to that of India and have opted for the dual GST route. For instance in Canada, the dual GST route obviously cleared up the conflict between states and the Union government in terms of revenue generation and tax collection, and allowed for a consensus to be formed. But then, Canada owing to the dual nature of its GST has not been able to unify the nation as a common market, with different taxes in different provinces still in effect.
In India, though the scrapping of the proposed additional 1% inter-state tax has cleared the air considerably making businesses happy, the states still need to agree on a common rate. And while states like West Bengal and Bihar will be happy with a low tax rate, many like Tamil Nadu are expected to ask for a much higher rate. At the high-end, some states have even asked for a GST rate of 27%. But then, experts believe, a tax rate that high can completely negate the positive effects of GST. "The current combined Centre and state statutory rate for majority of the commodities works out to be 26.5% (CENVAT : 14%, and VAT: 12.5%). Once GST is implemented, the same is expected to reduce to a standard rate to
[ The long queues of goods carriers at checkpoints should become a thing of the past with the implementation of GST. In India, trucks, according to some estimates, on an average, spend 48 hours per trip at various check-posts. ]
about 18-21%. This will naturally be beneficial for the end users. But if the tax rate goes beyond 18-21%, a lot of the benefits of GST will be lost," says Harpreet Singh Malhotra, Chairman & Managing Director, Tiger Logistics.
And then there is the issue of tax refunds from state governments, with some states known to be tardy with refunds. Rakesh Shah, Director, Nipha Group, a Kolkata-based exporter of engineering goods, while speaking to The Dollar Business on the dual-GST sytem says, "This is the biggest drawback of the GST regime from our perspective. Some state governments do not have a great track record of refunding taxes and there is nothing in GST so far that makes us believe that they will change their behaviours."
There is another fear – inflation.
The proposed tax regime has raised fears of inflation at a time when CPI has shot up beyond the official tolerance level of 6%. Outgoing RBI Governor Raghuram Rajan has cautioned the industry that there could be a generalised inflationary effect on the economy due to price adjustments after implementation of GST. However, the Governor has also clarified that he expects the inflationary pressure to be negligible. Citing the example of Malaysia, he said that the inflation in Malaysia was both negligible and short-lived and this is expected in India as well due to a one-time price adjustment of goods and services.
Potential inflation will depend significantly on the final rate of GST and the basket of goods and services that will be exempt from GST. Meanwhile, RBI Deputy Governor Urjit Patel has pointed out that about 55% of the items that form the Consumer Price Index (CPI) will be exempt from GST, making the inflationary impact negligible. Even a Nomura report estimates GST to impact headline CPI inflation by just 20-70 basis points (bps) and core CPI by 10-40 bps in the first year of implementation. And that would be on account of higher prices of electricity, clothing and footwear, healthcare, medicine, and education after accounting for input taxes.
Food items like cereals and vegetables are expected to become more expensive. Essential items like health services and medicines will also become expensive as they presently are subjected to lower tax rates, even if GST rate is capped at 18%. As of now, products like alcohol and petroleum have been kept out the GST ambit; clarity is yet to emerge on whether there will be more exemptions. With various industry bodies lobbying for exemptions or lower rates, it is plausible that we will see more products and services being exempted. That being said, in the past, countries (like Malaysia and New Zealand) which have opted for GST have been known to face high inflation and slowdown in consumption initially. Whether history will be repeated in India depends on a host of factors, the most important being the standard rate of GST finally agreed upon.
If GST improves ease of doing business, can exports be far behind? With uniform taxation and cost efficiencies owing to reduced time and costs in transportation, one obvious effect would be that 'Made in India' products would now be more cost competitive in the global markets. "In the previous tax regime, our exports were sagging, since we also exported a major portion of taxes. Indigenous manufacturers failed to capitalise owing to double taxation. All this will change post GST. And eventually exports from the country will increase," says Nihal Kothari, Chairman, National Council on Indirect Taxes, ASSOCHAM and Executive Director at Khaitan & Co.
And he is right! We have examples of GST boosting an economy's exports. For instance, New Zealand implemented GST in CY1986 and saw it exports jump from $5,880 million in CY1986 to $7,195 million CY1987, a growth of 22.36%. Similar was the case with Australia, which implemented GST regime in CY2000. Australia's exports grew at a CAGR of 7.9% from $63,870 million in CY2000 to $86,565 million in CY2004.
The present system of differential multiple tax regimes across sectors of production and locations leads to distortions in allocation of resources as well as supply chain and warehouse structuring. There is a tendency of manufacturers to locate manufacturing facilities as well as warehouses in states or locations that offer better tax structures regardless of their suitability in terms of other resources. With regard to India’s exports, this leads to lack of international competitiveness of the sectors which would have been relatively efficient under distortion-free indirect tax regime. Add to this, there is a lack of full offsets of taxes loaded on to the FOB (Free On Board) export prices. This results in export competitiveness further getting negatively impacted. Efficient allocation of productive resources and providing full tax offsets, as envisaged under the GST, is therefore expected to result in gains for exporters. According to a paper on GST by the National Council of Applied Economic Research (NCAER) submitted to the 13th Finance Commission, gains in exports are expected to vary between 3.2% and 6.3% (while imports are expected to rise somewhere between 2.4% and 4.7%).
Sectors which are expected to see a substantial increase in exports include textiles and readymade garments, beverages, industrial machinery for food and textiles, transport equipment other than railway equipment, electrical and electronic machinery, and chemical products. Further, while agricultural machinery, metals and railway transport equipment are expected to gain moderately, exports is expected to decline when it comes to agricultural commodities, iron and steel, cement, wood and woodproducts except furniture.
A mixed bag of good and bad news could therefore be on offer for India's exporters. And it will be that way with some sectors emerging as winners, while others losing out on a few advantages. However, what can be a bigger cause of worry for exporters is the ambiguity with respect to various export promotion schemes allowed by India's Foreign Trade Policy (like MEIS, SEIS, EPCG, DBK, Advance Authorisation, etc.) during the initial GST implementation phase. Exporters are allowed to claim refunds on Central Excise, Customs duties and Service Tax against various scrips issued by the Ministry of Commerce. Since Central Excise and Service Tax will be subsumed under GST, exporters may face problems in encashing the much-needed incentives that have been structured to support exports. Asks Shah of Nipha Group, "Exports are zero rated, but GST retains the refund system at the final stage which will mean increased blockage of funds. A number of current export promotion schemes will wither away or get diluted. Similarly, what will happen to our dues during the transition from the current system to GST? How will they be treated?"
Office of the Directorate General of Foreign Trade (DGFT), Ministry of Commerce, GoI, is aware of the issue. D. K. Singh, Additional DGFT, while speaking to The Dollar Business says, “Under the current system, one can pay Customs Duty, Central Excise Duty and Service Tax. But, since Central Excise will be replaced by other taxes such as IGST and SGST under GST, it may not be a smooth transition for our exporters. So, we have requested the Finance Ministry to reconsider and allow us to maintain the scrip.” As per him, the matter is currently under examination by the Ministry of Finance.
The current indirect tax regime provides for lower or no Customs Duty on imports for importers who use those imports in producing goods that are subsequently exported. However, under GST, imports would be subject to IGST (CGST plus SGST) and any exemptions or additional levy will not exist. This would provide level-playing field to domestic manufacturers against importers.
In case of special economic zone (SEZs), the various exemptions provided under different schemes would be limited in their applicability to export duty only. Exports or deemed exports would be zero rated, but sale to domestic tariff area (DTA) would be taxable. Exports from these special zones though will get a leg-up by being more cost competitive, owing to reduced logistics costs.
GST has the potential to revolutionise the logistics industry. India’s trucking and logistics sector will realise its worth once GST is implemented at the ground level. Experts believe that the tax procedure will get reduced dramatically and the cost of holding inventory will fall by 50%, since stock would no longer need to be piled up in various warehouses. Analysts estimate that the logistics sector will witness up to $200 billion in savings annually with GST, thanks to faster movement of goods and minimum idling, which have troubled the industry for long now.
Explaining the issue of idling, Harpreet Singh Malhotra, CMD, Tiger Logistics says, “Prolonged delays at toll booths and extra fuel usage due to regular idling were resulting in annual losses of more than Rs.1,00,000 crore. Such delays don’t just burn money, they slow down business too.” According to Malhotra, while trucks in US are said to cover a distance of 800 km every day, in India they cover only 280 km a day. There is no surprise in the fact, because where average US truck speeds exceed 89 km per hour on highways, 12.7 km per hour is considered good as long-distance average in India. “Once GST gets going, these challenges will become a thing of the past,” adds Ramesh Agarwal, CMD, Agarwal Movers Group.
According to logistics experts, the Indian logistics industry spends around 14% of the GDP every year on different types of cost incurred in logistics operations. The amount of cost incurred is very high in comparison to the logistics cost incurred in different nations. This scenario is expected to change once GST is in place. In fact, 3PL logistics market in India is expected to be worth $301.89 billion by 2020. This growth is based on expectations that GST will soon be implemented and logistics companies can optimise their operations to reduce cost and increase margins.
“GST will convert a diversified tax regime into one uniform tax rate making India a single market place. This would facilitate seamless transportation of goods across borders with a significantly lower transit time, thereby stepping up demand for logistics services. The GST Bill will also lead to higher vehicle capacity utilisation resulting in increased efficiencies at every node of the logistics ecosystem. Overall, this is a positive move that will generate growth opportunities for organised players within the logistics industry,” says Abhishek Chakraborty, Executive Director, DTDC Express Limited.
Apart from simplifying the tax structure, GST will bring in huge relief to several players at the operational level as they can now do away with fixed costs of maintaining warehousing across various locations in India. “The fixed warehousing overheads of companies across industries will decrease by 30-32% and that will make them more competitive in the international market. Portable and virtual warehousing will become a viable option for many companies. It will also enhance their operational efficiency,” says Agarwal of Agarwal Movers Group. Although various logistics players and experts are expecting a short-term inflationary impact on exports, consensus is that GST will, in the long run, increase competitiveness of Indian exporters.
India’s automobile exports contracted 9.7% during the first quarter of this fiscal, with shipments of three-wheelers nose-diving as much as 46.6%. Last year, however, overall exports from the sector grew marginally at 1.91% over the previous fiscal, with commercial vehicle segment leading the exports growth.
Come today, the automobile industry seems to be thrilled with the notion of a simplified tax regime. “The current tax structure on automobiles is riddled with complexities,” says Vivek Mishra, Partner & National Leader – Indirect Tax, PricewaterhouseCoopers.
Currently, automobile sales are subject to six different types of tax at various rates which include Excise Duty, Infrastructure Cess, Octroi, VAT, Motor Vehicle Tax/Road Tax and Tax Collected at Source (TCS). What's more? The variation in each of these tax rates, according to vehicle type, engine size and ground clearance, further compounds complexities. GST, once implemented, will remove the cascading effect of taxes and put Indian automobile industry on a stronger growth trajectory. 
All taxes on input paid will also be offset with the output liability of GST. Owing to different types of indirect taxes collected by the Centre and States separately, taxes paid on some of the input costs currently cannot be set-off against the final tax. Some of the common examples include Service Tax paid on certain inputs such as rent, IT, freight, etc., and lower tax credit on outsourcing activities, etc. This is likely to change once GST is implemented.
Further, since CST will be subsumed in GST, manufacturers will no longer be required to have warehouses at multiple locations across states. The 2% CST, which currently is a cost to the manufacturer, will become a part of IGST, and the manufacturers will not be liable to pay this origin tax.
Under the current regime, Excise Duty on vehicles is categorised into four slabs, in which smallest duty is applicable on smaller cars. But within the GST framework, taxes levied by the Central government such as Excise Duty and by state governments as Sales Tax would be subsumed into one tax uniform tax. If the proposed tax rate of 18-20% is approved, the prices of vehicle are expected to decrease by almost 8-18%, and a reduction in automobile cost structure will not only fuel demand for automobiles in the domestic market but will also make India-made vehicles more cost-competitive in export markets.
The industry expects a dual tax structure for small and big cars to be announced when the government is ready with the final GST laws. “According to a report by the Committee on Economic Affairs, the proposed GST rate on SUVs is 40%. Therefore, SUV prices may increase slightly. But for all other cars, there will be a significant reduction in rates,” says Mishra.
The current indirect tax provision categorises cars into four segments, with all attracting different sets of tax rates. While small cars (less than 1200 cc) attract a total of 27.6% tax (Excise Duty 12.50% + Cess 1.1 % + VAT 14%), medium cars (1200 cc - 1500 cc) attract 39.1% tax (Excise Duty 24% + Cess 1.1 % + VAT 14%). Luxury cars (beyond 1500 cc) and SUVs (also beyond 1500 cc), on the other hand, attract 42.1% (Excise 27% + Cess 1.1 % + VAT 14%) and 45.1% (Excise Duty 30% + Cess 1.1 % + VAT 14%) respectively. Therefore, cars manufacturers end up paying tax in the rage of 27.6% (minimum) to 45.1% (maximum). If the proposed GST rate of 18-20% is accepted, small as well as big cars, excluding SUVs for which 40% rate has been discussed, will become cheaper and fuel the growth of the auto industry.
While the automobile industry is betting big on the new indirect tax regime, it has apprehensions over the tax rate. How will the new rates be decided? Will there be a uniform rate for all size of cars? Will they all fall under the same 18-20% tax rate bracket? The question seems to be more about whether the government will decide rates based on efficiency or the capacity of cars.
Nevertheless, if the industry’s predictions are anything to go by, automobile exports will be a major gainer from the new tax arrangement. The GST will help relax the burden of double taxation, unravel complexities and enhance ease of doing business for export-oriented automobile manufacturing hubs. However, the major challenge for the exporters will be to effectively manage their cash flow amid this shift from an exemption-based tax system to a refund-based system.
The GST system would also encourage Indian vehicle manufacturers to produce cars of international standards. Under the current regime, a manufacturer has to comply with a labyrinth of taxes, which act as huge hurdles and add costs at each stage. Foreign investors are reluctant to invest in India, primarily because of the country’s regulatory and bureaucratic complexities. In the absence of GST, not only Indian car-makers but foreign too have to waste energy in their operations. A successful enactment of the new indirect tax regime would have a transformative effect on FDI in India. GST will also lessen overall production cost and hassles, thereby encouraging domestic as well as international car manufacturers to expand their businesses and make Indian products more qualitative and competitive across the world. A very similar situation is applicable to the engineering and capital goods manufacturing sectors.
According to a Care Ratings report, “the complexity in the Engineering Goods sector is that companies are involved simultaneously in manufacturing of goods and rendering of services. For example, a company engaged in manufacturing of transmission towers also does EPC (Engineering, Procurement and Construction Services) of entire transmission lines which not only involves manufacturing of transmission towers but supply of bought out items and rendering of services. The EPC players pay service tax at present while the manufacturers pay excise duty. Introduction of GST is expected to improve the prospects of engineering, capital goods and power equipment (ECPE) sector by simplifying the tax structure.” And not to say the industry too has embraced the GST regime with both hands and hopes that it will transform the sector. Arvinder Pal Singh, Owner of Perfect Vibrator Company, a Delhi-based manufacturer of construction machinery parts, says, “GST is good for our industry. GST needs to be implemented as there would be a common tax. If there is one tax system, it will help in setting up the company anywhere in the country and also facilitates ease of doing business.”
N. B. Ashok Rao of Rajeev & Co, manufacturer and exporter of ball valves, holds similar views. “GST will help in bringing down the cost of production in manufacturing of goods. The major advantage is that it facilitates inter-state trading which was earlier quite cumbersome due to various levies at different levels and in different states.”
Players in the engineering sector are proposing that the tax rate under GST regime should be kept at a minimum level as it will result in lowering the final cost of products. “Tax rate should be 18% as it will benefit the industry in keeping the cost of production low and in turn passing the benefit to customers in form of lower-priced product. The proposed 22-25% tax structure would be too high for the industry,” says Singh. Rao also supports the 18% tax rate adding that “there is no direct benefit of GST on exports but lower costs at manufacturing level can automatically promote trade at both national as well as international levels.”
The engineering sector, being the largest of the industrial sectors in India, is of strategic importance to the economy owing to its strong integration with other sectors. And as such it plays a pivotal role in the development of other industrial sectors of the economy. In fact, today, engineering sector accounts for about a quarter of the total factories and more than half of the overall foreign collaborations in the country.
Hence, the proposed tax rate and structure under GST for the industry should be such that it avoids procedural difficulties for exporters and make their products competitive in export markets. “Instead of first paying the taxes and then claiming credit for the same, the proposed enabling GST law should exempt exporters from the taxation net since the country does not want to export taxes,” says T. S. Bhasin, Chairman, Engineering Export Promotion Council (EEPC).
As per Bhasin, the turnaround time for tax return processing needs to be sped up tremendously. "Even if we consider six months on average, engineering goods companies will require a huge additional working capital," he says. Further, post GST, buyers too will have to ensure that their vendors have robust IT infrastructure and compliance process in place, so that vendors do not default on timely and appropriate payment of taxes.
When it comes to pharmaceuticals sector, another key foreign exchange earner for the country, the reaction to the passage of the Bill has been mostly positive.
GST will not only simplify tax structure, but will also create a level-playing field for Indian pharmaceutical companies vis-à-vis foreign competition. "The biggest advantage to the industry would be that of reduction in transaction cost, with an immediate impact coming from the discontinuance of CST. The multistage taxation along with the inability to take full benefit of the CENVAT credit /refund has been an issue for the industry. With central GST expected to be a single rate for goods and services, going forward credit accumulation may not be an area of concern," states the report from Care Ratings. Furthermore, if the legislation provides for carrying forward of the unutilised credit this would be an additional boost to the industry.
However, there are concerns about drug prices, exemptions and compliance procedures. Some analysts have warned that there could be a mild inflationary impact of GST on prices of medicines over the next one-two years. “Currently, medicines are taxed at 5% to 7.5%, depending on the state they are being sold. Post GST, our tax liability will increase to 12%. This will put further financial burden on our customers,” believes Rahul Thakral, MD, Biotic Healthcare.
Terming inverted duty structure "the biggest challenge" for the sector, Kanchana T. K., Director General, Organisation of
[Under the current tax regime manufacturers seem to locate manufacturing facilities as well as warehouses in locations that offer better taxstructures, regardless of their suitability. No Shiny Gem For All]
Pharmaceutical Producers of India (OPPI), says, “inputs are taxed at 12.5% currently, while finished formulations are taxed at 6% from a Central Excise Duty standpoint. The difference is accumulated as a value-added tax credit (CENVAT), but no provision exists for refunds against accumulated CENVAT credits. The process of getting refunds under state VAT rules (where they exist) is also a long one.” However, suggesting a way out, Kanchana adds, “specifically notifying the pharmaceutical industry under the model GST law and making the process of refund easier by automating it, would make a huge difference to drug manufacturers.” Well, a big first step in this direction is the provision in the draft GST which allows refunds in cases where the GST rate on inputs is higher than the GST rate on outputs.
Some industry experts even forecast a possibility of negative impact on pharma sector if rate exceeds 12% because, as per them, the impact on pharma is largely rate-dependent. Similar concerns are echoed by Thakral of Biotic Healthcare who envisage a rate range hovering somewhere between 10-12% to be optimal. "Anything beyond, will negatively impact pharma industry," he says.
Prime Minister Narendra Modi, in his speech post passage of the Bill in Parliament, described GST as one more pearl in India's necklace. The metaphor may be apt when it comes to overall tax reforms, but India's gems and jewellery industry is, however, circumspect about GST's glitter. Almost all major stakeholders in the exports segment want the government to levy the minimum possible tax rate on the industry under GST.
The concept of Revenue Neutral Rate (RNR, a tax rate that allows the government to receive the same amount of money despite of changes in tax laws) is at the heart of the debate on calculating the acceptable and feasible GST rate for the gems and jewellery industry and other industries for that matter.
In fact, the government had published a report on RNR and the structure of rates for GST, prepared by a committee chaired by Chief Economic Advisor Dr. Arvind Subramanian in December 2015. A survey was then carried out by the National Sample Survey Organisation, based on the report. The survey found that the tax structure for the gems and jewellery industry had been formulated at a subsidised rate and, as a result of that, other industries are paying a price. In a nutshell, the survey findings were not in favour of the gems and jewellery industry. And the chances are high that incidence of tax on the industry will increase once GST is implemented.
Well, the industry is crying fowl over the findings! According to Sanjeev Agarwal, CEO, Gitanjali Exports, one of the key objectives of the survey was to ascertain luxury and non-luxury product categories and, unfortunately, while doing so, the survey categorised gold as a luxury product. “In my opinion, the analysis is flawed for some obvious reasons. For instance, there is a possibility that households with low or no literacy level might not have understood the significance of the survey and ended up providing inaccurate gold investment details which might have had an adverse effect on the outcome of the survey,” says Agarwal. 
Moreover, as per Agarwal, the survey didn’t differentiate between rural households and households that are dependent on the agrarian economy. "The distinction is crucial given the fact that agrarian economy enjoys substantial tax benefits," says Agarwal. In fact, a huge share of earnings in the agrarian sector is beyond the ambit of tax-net. In addition, the penetration is gold is higher than the penetration of bank savings account in the country, which inevitably, makes gold, an unofficial currency in the rural areas. So, the survey inference that says that gold is being heavily subsidised and benefits are accrued to the rich and wealthy is inappropriate, feel industry insiders.
In fact, the industry is unequivocal in its demand that GST should be levied at the lower slab. Gems and Jewellery Exports Promotion Council (GJEPC) has already submitted a preliminary report prepared by a Mumbai-based law firm, Economic Law Practice (ELP), after gathering feedback from various manufacturing segments of the industry like plain gold, diamonds and coloured gemstones. “Our key concerns are that supply and manufacturing side should not be overburdened with taxes, and getting tax input credit refund should be smooth. Above all, our exports should remain competitive,
[ GST will provide the much-needed boost to India's automotive industry, primarily because of the removal of cascading that is expected with the new tax regime.]
given the current global scenario,” says Sabyasachi Ray, Executive Director, GJEPC.
One shouldn’t forget that there are past instances of higher tax structures proving detrimental to the country in more ways than one. For instance, the 10% import duty on gold, although succeeded in reducing gold import through official channel, it has also encouraged smuggling of gold inadvertently. According to various estimates, almost 200 tonne of gold worth Rs.60,000 crore is smuggled into the country every year.
Textile is another industry on which GST might have a negative impact. While the final GST rates are yet to be announced, even at the 12% lower rate recommended by the Dr. Arvind Subramanian Committee, the textile sector is likely to be negatively impacted. In fact, the cotton value chain is likely to be the worst affected as it is currently attracting zero Central Excise Duty.
What's more? Industry rating agency ICRA expects that "due to reduced tax advantage of cotton yarn vis-a-vis man-made yarn, there can be a gradual shift in the domestic textile industry towards manmade fibre." For the uninitiated, India currently operates with a fibre mix of cotton: manmade of 60:40, as against global average ofof 40:60. "However, the degree of impact will depend on the final rates which will be applicable to the sector," states the report.
But then, there are some positives as well. "GST will give a fillip to the outsourcing processes in textile industry. It will translate to administrative ease and can help in significantly curtailing discrepancies and aberrations in the taxation system. Corruption and black money laundering will also be curbed," says K. K. Lalpuria, Executive Director, Indo Count Industries Ltd., a company engaged in the manufacturing and export of cotton yarn, grey knitted fabrics and cotton made ups.
Further, with input tax credit chain becoming more transparent and integrated, the tax credit for exporters will become easier and full credit of indirect taxes can be claimed. But at the same time, the Duty Drawback scheme, which aims to provide credit of indirect taxes, will lose relevance under GST. While export products, where the current duty drawback rates are lower than the incidence on indirect taxes on inputs, will benefit under GST, sectors, where drawback rates are higher, will take a hit in profitability.
Not banking on GST
One sector that has viewed GST sceptically is the services sector. "There could be a decrease in consumption of services as the service tax will move northward from the current rate of 15%," says Saravana Kumar, Chief Investment Officer, LIC Nomura Mutual Fund. For instance, tax rates for telecom service providers could move up to 18-22% from the current 15%, resulting a dip in profits. This increased tax could also pinch consumers at the bottom of the pyramid.
Further, GST is also being viewed by some as a “landmine of compliance”. Service providers will have to file over 30 returns every month based on their operations and geographic spread. There could also be issues on bringing credits under IGST. A case in point could be a transaction involving a Mumbai resident using Vodafone telecom services travelling to Bengaluru and making calls through an Aircel network. It remains difficult to determine and calculate the importer and supplier in such complicated transactions. Telecom service providers could also have challenges defining interchange costs (the amount that a telco pays a receiving network), besides finding it restrictive to market free and bundled services.
The GST Bill is also leading CFOs of banks and financial corporations to ponder on the nature of business and areas that could be potentially hit. "For banks, the challenge could be further complicated as they may be construed as e-com operators for facilitating supply of services or goods through an electronic platform. This will result in an added obligation to collect tax
[ For telecom companies, the incidence of taxes will increase post-GST. More Good Than Bad? ]
at source. Under the present regime, there already exists litigation on whether banks or NBFCs are liable to pay taxes as dealers," says Nihal Kothari, Chairman – National Council of Indirect Taxes, ASSOCHAM.
Even IT companies are wary of the GST. Some feel the proposed tax regime could lower the competitiveness of India's IT sector. "Companies engaged in the supply of services on a pan-India basis, will have to seek registrations in 37 jurisdictions. Complex billing and invoicing requirements due to place of supply and valuation will hit the service sector hard in general and IT in particular," says R. Chandrashekha, President, National Association of Software and Services Companies (Nasscom).
"While the bill has been embraced, its success will be defined by its implementation"
Well, GST comes with its own set of challenges. For most companies, overhauling the entire IT systems is the biggest challenge and this process could take anything between 6 to 9 months. While the government issued the first draft model GST law over a month ago, further details are awaited on aspects relating to compliance such as invoice formats and return details. “We anticipate several teething problems in transitioning to the GST regime. In the initial months, we anticipate that a parallel system for undertaking compliance will be required. The complexities are far more for services companies, where a lot of ground needs to be covered to get clarity on taxation of pan India contracts involving multiple states,” says Mahesh Jaising, Partner, BMR & Associates LLP, a tax advisory firm.
Companies are even hiring experts to help them make a smooth transition from current tax regime to GST. For instance, FMCG major Emami has hired PricewaterhouseCoopers to assess the impact of GST regime on the company and chart a roadmap to realign company’s strategy accordingly. “Migrations from current regime to GSTN (Goods and Services Tax Network) will start from
October 1, 2016,” says L. Badri Narayanan, Partner, Lakshmikumaran & Sridharan. Narayanan’s firm is an advisor to Infosys, the system integrator in the GST project. He shares that most suppliers’ data will be transitioned from Excise, Central Sales and VAT to GSTN, however, suppliers will have to request for registration for migrating to ISD (Input Service Distributor).
While most legal experts sound optimistic that the system will be operational by end of 2017, industry and technology experts opine that building a system from legacy could have potential barriers. Narayanan is hopeful that the GST network will be ready and operational by April 1, 2017, but the transition period could result in working capital issues for traders. “A trader is neither manufacturing nor providing services, and if he is not eligible for CENVAT credit within the old regime he will not be entitled to CENVAT credit on duty paid which he earlier received,” he explains.
A major change involving GST implementation is its compliance, which will necessitate robust systems and tracking of information. Since the entire process of tax has been revamped, the process of accounting and auditing will also undergo a change. Much of this change will occur on the systems that organisations use for compliance. “Entire ERP systems will need to be re-configured, and staff will have to be trained on GST aspects. The onboarding of vendors could result in a big change. There is need of support from finance, procurement, legal, IT, and many other departments for positive outcome of GST, else the holistic picture may not be possible,” says Pratik Shah, Partner, SKP Business Consulting LLP.
[Thus far, Indian exporter-manufacturers were at a huge disadvantage due to overlapping taxes. But with GST, hope is, matters will change for the better.]
As manufacturing becomes advantageous, organisations will be motivated to manufacture commodities themselves rather than procuring them. For service organisations, they will be compelled to think on operating back-office centres themselves. On the positive side, from the government's perspective, GST systems across the globe have improved compliance, and in many-an-instance we've seen even a revenue neutral rate turning into revenue positive due to an expanded tax base.
The successful implementation of GST will depend on i
ts smooth passage in the states, and the formation of a GST council that drives consensus on rates, exclusion lists, applicability limits, principles of supply, special provisions to certain states, and a host of other rules and regulations. Even the time chosen for implementation will matter a lot when it comes to confusion and litigations. “Full-fledged IT system should be in place so that there is no dispute in arriving at the losses incurred by states in the first five years. An April 1, 2017 roll-out may affect the last quarter business of FY2017. Hence, implementation during mid 2017-18 would be ideal and preferable,” says Ashok P. Hinduja, Chairman, Hinduja Group of Companies.
Whatever be the implementation hassles and timeframe, the fact remains – GST is a big step towards making India a unified market. The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST) will not only reduce the cost of locally manufactured goods and services, but will also increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. That by our count is more good than bad.
TDB: What changes for the industry with the passage of the Goods and Services Tax (GST) Bill?
Nihal Kothari (NK): We (industry) will have to forego the definitions that we were working with until now. The commencement of a unified tax system from an earlier complex one with multiple sources will make indirect tax processing simpler. The process of simplification extends to foreign investors who would find this system easier to fathom.
In the previous tax regime, our exports were sagging, since we also exported a major portion of taxes. Indigenous manufacturers failed to capitalise owing to double taxation. Assocham has been championing the cause of GST, and when we presented this to the Ministry, we were keen to have it implemented as a part of Fiscal Federalism. The expectation from GST is to have a single market.
The biggest takeaway from the entire exercise of implementing GST is that the Ministry and the policymakers have taken cognisance of the industry demands. To give you an example, in our presentation to a select committee of Rajya Sabha, we suggested the 1% additional tax on IGST be scrapped, and, in a welcome gesture, the additional tax has been dropped.
TDB: Manufacturing sector seems to be in an advantageous positon. But, what about services such as aviation, e-commerce, telecom, banking and financial services, etc.? How would GST impact them?
NK: Industries such as e-commerce, aggregators have usually found uncertainty in state taxes. GST has clarified that it will be the e-com player, who will deduct the tax at source from commissions. They will be eligible to claim it as credit. The supplier will have to pay the GST, and get credit from e-com companies. The process is quite similar to TDS. There could be some working capital implications, but other issues such as discounted sales, will fall into tax net. Aggregators will pay the tax under the GST provisions. For example, taxi owners need not pay, but the aggregator of such services will have to pay.
The new regime will not cover taxes on Basic Customs Duty, taxes on immovable properties, stamp duties, excise duty on petro products, tobacco, potable alcohol, entertainment taxes by local bodies, tax on sale and consumption of electricity, VAT on petro products and taxes on transaction in stock markets and futures. Excise and VAT on ATF (air turbine fuel) will be added to cost if no input tax credit is available. That will increase cost of air travel. Aviation leasing will be a part of services tax, and this will have a major impact on the viability of the sector.
There would be a moderate rise in cost due to service tax rate increase from 15% with respect to banking and financial services, telecom or fee-based services. For banks, the challenge could be further complicated as they may be construed as e-com operators for facilitating supply of services or goods through an electronic platform. This will result in an added obligation to collect tax at source. Under the present regime, there already exists litigation on whether banks or NBFCs are liable to pay taxes as dealers.
TDB: What complications, if any, do you expect during the implementation of GST?
NK: Currently, the GST Bill is still a draft bill. Respective states will have to legalise and provide their inputs. However, the framework has some issues, pertaining to transition on the areas of tax credit, compliance, taxability, place of supply, etc. There are still cases of which products to be categorised within a good or service categorisation. For example, credit card factoring are actionable claims and fall under services, but sale of securities and derivatives would fall under supply of goods. With regards to financial lease, there was a dispute whether it was subject to VAT. But that has been eliminated and it is a service now.
TDB: How will compliances change for the industry?
NK: GST will simplify indirect taxation, but administration would become complex. Monthly returns will increase and annual returns will have to be reconciled. There is lot of work each organisation has to do with the monthly return and providing of transaction detail. Further, a CA audit is necessary if one passes the threshold limit. In the next step, a CGST officer scrutinises the returns and it can be processed without the physical presence of the assessee.
If suspected of tax evasion, there are special audits conducted. The inspecting officers have been given the power to arrest. Inspecting authority also has the power to issue summons. With the kind of tax system that we have seen, only time will tell us if this kind of administration will remain relevant or lead to inspector raj.
TDB: What are the industry’s expectations from GST?
NK: The industry is expecting creation of single and uniform GST rates and a simplified and transparent tax structure. This may result in an increase in compliance and certain restrictions. However, it would reduce the cascading tax effect on non-GST taxes and improve competitiveness of export through
zero rating. Furthermore, the policy should also provide tax certainty on products such as petrol, etc. The industry has just witnessed the Bill being passed, we expect some changes to take place with time as was the case with CENVAT credit.
Harpreet Singh Malhotra, Chairman & Managing Director, Tiger Logistics
TDB: What’s your opinion on Goods and Services Tax (GST) as a new tax regime?
Harpreet Singh Malhotra (HSM): It will revolutionise the Indian logistics industry. Companies will be in a position to hold inventory in just one large central warehouse, rather than stocking goods in various smaller warehouses. For, standard tax rates will preclude the need for multiple warehouses across states, which was partly driven by the need to follow tax codes in all states.
TDB: How do you think GST will contribute to the ease of doing business?
HSM: A lot of tax procedures will be reduced dramatically and cost of holding inventory will fall by 50%. For example, an FMCG behemoth may build large mother warehouses at pivotal points across the country. Multiple logistics companies could then be hired to handle distribution and supply chains, leaving the company free to focus on its core activities. Standard taxation will boost bottomlines and inject efficiency into the trade that has till now attracted mostly unorganised players.
TDB: What kind of impact will GST have on logistics sector?
HSM: The logistics sector would witness savings of up to $200 billion annually with GST, thanks to faster movement of goods and minimal idling. Thanks to an efficient ecosystem emerging via GST, overall costs will fall, benefitting all stakeholders, including end customers.
Till date, India’s logistics and freight sector has remained largely disorganised. GST would subsume all Central taxes and various local levies, eliminate time-wasting checkpoints and make diverse verticals across India more efficient through faster deliveries of goods and services.
In essence, from a nation of multiple markets, India would be transformed into one common market backed by borderless, barrier-less systems permitting free movement of goods and services. As with warehouses, companies and logistics firms will be in a position to use fewer but bigger trucks to transport their consignments – further reducing pollution and curbing traffic congestion. Many companies may even outsource logistics operations as lower costs make this viable. Moreover, they could adopt the hub-and-spoke model.
TDB: What are the challenges that logistics industry is currently going through? How will GST address those issues?
HSM: The Indian logistics industry spends about 14% of the GDP on different types of cost incurred in logistics operation. The cost incurred is much higher in comparison to the logistics costs incurred by peer nations.
3PL logistics market in India is expected to be worth $301.89 billion by 2020. This growth rate is based on the expectation that the GST will be soon implemented as the new tax regime and the logistics companies can optimise their operations to reduce cost and increase their margins.
TDB: How will GST help in bringing the cost of logistics down?
HSM: Despite being a low-cost service providing country, India has higher logistics cost due to various issues and challenges faced by the industry.
Apart from being entangled in complex tax structure, the industry is also affected by poor rate of customs efficiency of clearance processes and procedures which affects the international export logistics stratum.
Furthermore, sub-optimal comfort provided by the existing Indian infrastructure combined with lack of implementation of efficient IT-enabled tracking and tracing mechanisms has adversely affected the performance of logistics. In the long term, GST will drive further economic growth by giving a fillip to manufacturing activities.
Currently, multiple tax rates in different states create immense distortions in the allocation of resources. With GST in place, a single common market would completely transform the market dynamics and drive greater tax compliance. Being a multi-stage tax, GST provides an input tax-credit mechanism. Therefore, each link in this value chain, dealers and distributors included, will need evidence of compliance by the previous link to claim the necessary tax setoffs.
This will broaden the tax net by encouraging greater compliance. Ultimately, a tax regimen incentivising compliance will improve the ease of doing business and open up new investment avenues. The increase in compliance will also enhance the government's tax revenues and allow more expenditure on social infrastructure. Foreign and domestic investors will be comfortable taking a long-term perspective vis-à-vis operations in India. The country would then have truly passed the GST test.
TDB: What is the ideal rate of GST for the sector and why?
HSM: The current combined Centre and state statutory rate for majority of the commodities works out to be 26.5% (CENVAT : 14%, and VAT: 12.5%). Once GST is implemented, the same is expected to reduce to a standard rate to about 18-21%. This will naturally be beneficial for end users. But if the tax rate goes beyond 18-21%, a lot of the benefits of GST will be lost.
Vikas Anand, Managing Director, Dhl Supply Chain
TDB: How will GST affect the supply chain in India?
Vikas Anand (VA): With GST in the offing, the 3PL market is poised to re-invent itself. The development of supply chains is currently driven more by tax savings than by logistics efficiency, driving up transport and warehousing costs. With the abolition of central sales tax (CST), trade boundaries between states will not exist and companies can consolidate supply chains. This could really see hub-and-spoke strategies take off. Companies will have to adopt more advanced IT solutions and larger, more advanced, infrastructures. Companies that quickly adapt to the changing scenario will not only differentiate themselves, but will also successfully capture this major growth opportunity.
TDB: Do you think GST will really contribute to the ease of doing business in India?
VA: India, although a competitive market for logistics, could lag behind China and even European Union if the additional costs due to logistics inadequacies are taken into account. These inefficiencies exist in state-border delays, tolls and lost time due to paperwork. The major ease of doing business post GST would be the elimination of such delays at state borders and developing IT-based paperless solutions to replace the complex documentation requirements. This should also significantly reduce the cost of logistics in India. Cost of logistics will gradually decline to the global benchmark costs.
A single unified tax on both goods and services, with the objective of eliminating tax cascades, will bring about a transition from the existing origin-based to a destination-based taxation regime. Under the proposed taxation scenario, by using 'Network Strategy', every distribution-intensive company has an opportunity to re-look at their supply chain structure and gear up for the proposed tax reforms. They can now align their supply chain distribution network to customer markets rather than focussing on tax issues.
TDB: What changes are you expecting at the operational level once GST is implemented?
VA: The warehousing infrastructure in our country has been based on the tax structure, with different states having multiple taxes, leading companies to set up their production bases according to the multiplicity. With GST, there will be a marked change in the warehousing industry.
It will be possible to operate large-scale shared facilities with multiple users which will set the platform for consolidation in the post GST scenario. GST will make large regional warehouses economically viable as opposed to the multiple small ones set up to deal with the current tax structure. DHL Supply Chain is in fact well ahead of the curve; we have already invested in several large multi-client sites (MCS) in all metros. These offer a wide range of additional services that improve the performance of a customer’s supply chain. From sub-assembly, co-packing, customisation, postponement, kitting, sequencing to pre-retail activities across all industry sectors, DHL MCS solutions will help businesses lower costs, reduce inventories, and suitably match supply with demand.
TDB: What challenges do you foresee during the transition?
VA: The logistics industry in India is relatively fragmented. Road infrastructure needs to be developed, coupled with an improvement in cargo handling facilities at airports as well as seaports. Steps are being taken to improve the infrastructure, but the pace seems slower than the economic growth.
Simplifying the distribution network and merging smaller warehouses to regional centres will result in economies of scale being generated. Large shared distribution centres offer not only strategic, operational and financial benefits, but also allow for better cost control, forecasting, inventory rationalisation and synergies for consolidation in transportation.
In the changing scenario of a warehousing and supply chain concept post GST, companies will require well trained, professional and skilled employees who will be in a position to fulfil the growing demand for higher levels of operational and quality compliance. Companies like DHL are already investing in developing the skills of blue collared workers by imparting a consistent and standardised training.
TDB: What kind of growth opportunities GST will unleash for the industry?
VA: The industry would benefit with increasing operational efficiency from the expected ease of doing business post GST. Rationalisation of customer supply chains and optimal inventory management strategies would also create new opportunities for greater integration of global best practices and bringing the best value in logistics services to the customer. Most importantly, GST will create opportunities for greater economic growth and investment. And this would have a positive impact for the logistics industry.
TDB: What should be the ideal tax rate under GST and why?
VA: It is not our call to advise governments on the ideal rate. However, as an industry, we hope that the rate chosen would be revenue neutral, i.e. it would not increase the overall tax burden on the economy as that would act as a dampener for growth and investment.
Sujit Ghosh, Partner & National Head, Advaita Legal
TDB: What kind of operational hassles do you foresee in implementing the current Bill?
Sujit Ghosh (SG): Today, the draft GST Bill shows a design of what will come in future. I think this is a fair design and an implementation looks possible by October 2017 or latest by April 2018. Supplier registrations will commence in a couple of months.
There is a school of thought that litigations might soar post GST. But every new law will have debates and litigations as the implementing agency is assessing new methods, and such policy matters may not find immediate traction with people. Assesses are also testing waters, ultimately it is the judiciary which will take the final call on how the provision have to be interpreted. Litigation is evergreen!
TDB: Will the implementation of GST structurally change the pricing mechanism for products and services?
SG: I foresee an impact in certain cases. For example, in the case of a promotional offer of say “Buy 1 Get 1 Free” or “20% extra”, in the present regime the sales tax or service tax is based on gross consideration. Under the new regime the promotional supplies will also be taxable. This would change the nature of pricing as it falls under the Standards of Weights and Measures act, and any change in MRP will require some restructuring, which is a complex process.
TDB: Some industry observers believe that manufacturing will be the biggest winner, but there is nothing much for the service sector. Your take?
SG: Nobody is turning out to be a loser. Since GST is a consumption based tax, consumers might have to bear with the rise in taxes. GST will benefit both manufacturing and services as industry will be able to claim credit from a single pool. As credits start flowing, the cost of production will eventually come down, leading to a quantum reduction in prices.
TDB: How about sectors such as banking and IT/ITeS? Wouldn’t they lose their competitive advantage, as many believe, once GST is in place?
SG: For IT / ITeS, and even banking, to an extent, there will be no negative hit. With respect to relationship between a head office and branch office, there are disparities in understanding and interpreting the transaction. Companies such as banks and technology firms that have their central operations servicing remote locations may see an impact on inter-office transactions. But transactions between two different companies will not be hit.
TDB: With the GST in place, how will state specific incentives work?
SG: All state incentives will lapse as it stands now. However, negotiations with the government are on. But organisations should understand that a sea-change has been impacted only on the method of tax calculation.
"GST is a mixed basket of sweet and sour pills for pharma sector"
Rahul Thakral, Managing Director, Biotic Healthcare
TDB: What are your thoughts on the recently passed GST Bill? How is it going to impact the Indian pharmaceutical industry in the medium to long run?
Rahul Thakral (RT): I believe, GST will bring mixed results to pharmaceutical sector. Benefits can be seen at operational and logistics level. A uniform taxation system will also lead to ease of doing business. Some of the positives the GST era would usher includes binding the whole spectrum of goods and services with one uniform tax code. Currently, drug authorities in different states have different tax collection systems, which include VAT, CST, VAT input credits, etc. Post GST, there will be a better and rationalised tax structure. Another plus will be operational excellence as GST will transform the present warehousing and logistics systems. Today, going by the prevalent practice, we have pharmaceutical suppliers running to different states to minimise tax on billing due to varied tax structures across states. The current tax structure decreases operational efficiency of a company and results in an overall increase in the tax burden of the company. Once GST is in place, the traditional cost and freight (C&F) model will be replaced by a simple supply chain model practiced across the globe.
Talking about its disadvantages for the industry, with GST the chances are customers have to shell out more money in the short term. Currently, medicines are taxed at 5% to 7.5%, depending on the state they are being sold. Post GST, our tax liability will increase to 12%. This will put further financial burden on our customers. Free samples and gifts offered to clients will also attract tax now. This will increase the burden on pharmaceutical companies. So, overall, I would say GST is a mixed basket of sweet and sour pills for pharmaceutical sector.
TDB: How will GST impact cross-border pharma trade?
RT: Compared to exports, imports will benefit more. Taxation being uniform, the cost of imported goods will come down. Nevertheless, supply chain savings and operational efficiency would prevail at manufacturers' and suppliers' end in long run.
TDB: What should be the optimal GST tax rate?
RT: I believe, for the pharma industry, a tax rate hovering somewhere between 10% and 12% would be most optimal.
TDB: How will manufacturing benefit from GST?
RT: GST will provide the much-needed push to 'Make in India' initiative. Manufacturing will achieve operational excellence through GST. For instance, we are manufacturing in Panchkula in Haryana and supply to companies situated in Uttar Pradesh, which is an interstate transaction. Post GST, single tax will prevail across the country and traditional cost and freight model will be done away with, resulting in faster despatch of
our goods. Further, as of now, some manufacturers look for excise free zones, SEZ, etc., just to open their offices and get their billing done from the place. With GST, the whole concept of regionally based pharma mandi will be curtailed and the scope of such malpractices will be minimised to a large extent.
Areef Patel, Vice Chairman, Patel Integrated Logistics Ltd.
TDB: What will be the impact of GST on logistics sector?
Areef Patel (AP): The implementation of GST will be a game-changer for the logistics sector in India. With delayed halts at several inter-state octroi and check points becoming a thing of the past, the crucial tax reform will result in reduced transit time and improved inter-state transportation and faster movement of goods. With a singular tax governing transactions on a nationwide basis, there will be reduced paperwork for road transporters. There would be consolidation of warehousing operations as companies would locate their warehouses on logistics requirements and operational strategies and not tax-saving considerations, streamlining the entire warehousing setup in a big way. Inefficient supply-chains will be rendered redundant and their efficiencies will improve based on delivery and cost efficiency paradigms.
TDB: What will be the impact on exports following the implementation of GST, with regard to logistics?
AP: Though there is no provision for levying GST on goods to be exported, the tax component on logistics services will pressurise the margins of exporters. For exports of goods, which come under zero tax, clarity needs to emerge on suitable rules for tax credits and refunds. GST paid by them on procurement of goods and services will be refunded. The GST taxation structure will include Basic Custom Duty. Additional Customs Duty in place of Countervailing Duty (CVD)/Excise, and Special Additional Duty (SAD) in lieu of Sales Tax/VAT will be subsumed, leading to simplification of the taxing mechanism and streamlining various layers, which will ease doing business and increase the competitiveness of exporters. There would be a considerable reduction in compliance costs given the uniformity in tax rates.
TDB: Do you envisage difficulties due to the dual nature of India’s proposed GST structure?
AP: The implementation of the GST reform in the next fiscal is easier said than done with the federal structure of India impending smooth passage. The reform will need the ratification of 29 states of the Union of India within a very limited timeframe. To bring all the states on a common consensual platform is a huge task in itself, given the differing political affiliations and economic considerations between different states and the Central government. A huge challenge to the smooth implementation of the crucial tax reform would be a unified agreement on the compensation values accrued to the states as they stand to lose considerable tax revenue once GST is implemented.
TDB: What should be an ideal range at which tax (GST) rates should be fixed for logistics sector?
AP: Analysts and experts are largely of the opinion that a revenue-neutral-rate (RNR) of 18-20% would lead to a sizeable reduction in tax. However, with several contrarian forces working at cross purposes, a clearer picture is yet to emerge on the tabulation of a beneficial tax rate. The industry largely believes that a tax rate capped at 18-20% would be beneficial to all concerned stakeholders. A rate that is not inordinately high will also incentivise compliance, as a higher rate will lead to evasion. The logjam would be removed once the threshold and rates are decided by the GST Council.
TDB: Do you agree with the forecast of some economists that GST would lead to short-term inflation? Will it have any adverse impact of exports in the initial days?
AP: Once the GST regime kicks in, a short-term inflationary impact on exports is foreseen, given the expected tax rate. A hike in procurement expenses of goods and services is imminent. Though some uptick in costs differentials are expected, they will be transitory. In the long-term scheme of things, this reform will lead to enhanced competitiveness of Indian exports. With improved trade dynamics and reduced transit time in goods movements, the quality of Indian goods is set to beat international standards and create niche markets abroad. This in turn will create a wide export base for India and open hitherto untapped markets, improving its GDP numbers
considerably.
Sanjeev Agarwal, CEO, Gitanjali Exports Corp Ltd.
TDB: How do you see the passage of the GST Bill?
Sanjeev Agarwal (SA): GST was long overdue. At a time when business is going online big time, separate tax structures for the Central and state governments only give encouragement to tax arbitrage. Tax arbitrage is something which always erodes the key fundamentals of business – profitability and, of course, ease of doing business. It’s a fact that manufacturing and exports sectors tend to concentrate their operations in those states where state governments offer significant tax sops. That’s why certain states get preference over others due to those state’s ability to attract investment based on favourable tax regime powered by concessions. However, with GST, we can expect an all-round economic growth across the region.
In addition, there have been instances of significant revenue leakage across various sectors because of unbilled transactions, which is a residual effect of the burdens of taxes. Leakage of taxes always has an opposing effect across the value chain.
Moreover, existing tax structure always offers an uncanny feeling to honest taxpayers that they are being ‘penalised’ by bearing the maximum tax burden and tax evaders are gaining the upper-hand in the market by passing the undue benefit to the end-consumers – which is widely known as price-undercutting. Such scenarios are prevalent in every industry. GST will, hopefully, bring in uniformity in the tax ecosystem.
TBD: What should be the preferable GST rate cutting across industries?
SA: I strongly believe that higher tax structure translates into lower compliance. And to achieve higher compliance, the government should take a step-by-step approach. I think, at the moment, GST at 17-18% would be acceptable to every industry. At that rate, I think, compliance would be higher. And it will benefit both the consumer and the government.
TDB: When it comes to gems and jewellery exports, which segments will be affected more once GST is implemented?
SA: In my opinion, GST will not have much impact on diamond sector because 80-90% of diamond cutting and polishing and diamond jewellery manufacturing take place in SEZs, which offer the sector tax benefits. However, GST will negatively impact the gold jewellery, manufacturing and exporters the most because more than 60% of the gold jewellery manufacturers function from non-SEZ areas or domestic tariff area (DTA). In addition, gold jewellery share in exports now stands at 35%, which is significant. The share of gold jewellery in exports has grown significantly from 10% over the last 10 years. To maintain that growth, taxation structure has to be favourable especially for the gold jewellery manufacturers. If GST is not properly planned for the industry, the small gold jewellery manufacturers will lose their competitive advantage in the global market. It would be quite painful for them to see their Chinese or Thai counterparts outpricing them and taking away the larger share of demand globally.
TDB: What should be the ideal or acceptable GST rate for the gems and jewellery industry?
SA: It shouldn’t be more than 2%. More than 2% would be discouraging for the exporters. As Prime Minister Narendra Modi has urged the gems and jewellery industry to work on increasing the global demand for handmade jewellery at a recent meeting with the jewellers in New Delhi, Duty structure will play a key role in helping the jewellery exporters to realise that dream.
TDB: Government seems to have a strong view on gold and it’s getting reflected in various policy measures, particularly export-import policy. Your comments.
SA: Gold has a significant impact on the country’s socio-economic fabric. In that last decade, gold rate has grown at 14% CAGR while the bank deposit rate has grown at just 6% CAGR. So, inferences like gold is subsidised is flawed. Gold is firmly integrated into to the socio-economic fabric of the country, with the penetration of gold exceeding the penetration of bank accounts amongst the rural population of India. Hence, imposing tax or duty on gold and connecting it to GST will defeat the purpose behind implementing GST.
Anshul Rai, CEO & Co-Founder, H appay
TDB: What will be the impact of GST on your sector?
Anshul Rai (AR): The Payments or FinTech space is primarily a service industry and the major applied tax is service tax. Since tax under GST will be higher than current service tax, it will definitely impact the sector negatively in the short run. However, it will create a breathing room for businesses for whom payments is the only means to an end and they will not be impacted that badly. Say for an end retailer, if collectively other taxes get reduced by 2%, the increase on service tax will be negated.
TDB: Do you envisage difficulties due to the dual nature of India’s proposed GST structure?
AR: Yes, dual nature of India’s proposed GST may create issues. Some of the nuances have to be well defined by the GST Committee, else the proposed tax has the potential to complicate compliance. Let us consider a few scenarios: First, e-commerce: Since GST is a destination based tax, product prices may differ on the basis of the product delivery state.
Second, if services are provided across states to any client, invoice has to be raised considering state GST, and thus state-wise invoices would be raised for clients. And lastly, logistics companies will save significantly on compliance and tax since GST is destination based tax.
TDB: What, according to you, should be the ideal tax rate that would be beneficial to the industry?
AR: Tax under GST is definitely not going to remain the same as it is as of now i.e. around 15%. So assuming an upside, anywhere above 18% would give a bigger hit as compared to the rate below 18%. Also, I believe experts estimates inflation hike to be negligible below 18% GST rate.
TDB: As you have mentioned, experts are expecting short-term inflation post GST. How would it impact exports of goods and services from the country?
AR: There would be very minimal impact of GST on inflation and the impact, whatsoever, would be for short term. If you look at countries like Canada, Australia and New Zealand and also developing nations like Malaysia, where GST was implemented in April 2015, all these economies witnessed one-time increase in inflation for a very short period after GST implementation, which normalised eventually.
The subsuming of major Central and state taxes in GST, and complete comprehensive setoff of input goods and services, would increase the competitiveness of Indian goods and services in international markets and give a boost to exports.
TDB: Since tax rate under the proposed GST regime will perhaps be more than the current service tax rate, what bearing will that have on the service sector?
AR: In short run, there will be many negative impacts on the service sector. First, the tax rate will increase. Service tax is currently capped around 15%, but GST rate will definitely be higher. And in all probability, services will become costlier by around 3-4%. Also, because of dual nature of GST, if services are provided across states, multiple invoices will have to be raised state-wise. This will complicate both accounting and compliance.
Further, service tax returns and payments are currently made bi-annually. However, under GST, it will have to be done monthly leading to increase in regulatory and operation expenses. Having said that, in the long run, GST will definitely have a positive impact on service sector. Post GST, service sector will be able to claim credit on infrastructure investment done by them. Currently, credit can’t be claimed across taxes, for example, against VAT, sales tax, etc. Most importantly, the uniformity in tax rates and procedures across the country will go a long way in reducing the compliance cost.
Ramesh Agarwal, CMD, Agarwal Movers Group
TDB: How happy is the logistics sector with the GST Bill?
Ramesh Agarwal (RA): GST will bring about some truly positive developments in the logistics sector. First of all, it will put an end to multiplicity in the existing tax hierarchy. In addition, GST will reduce unaccounted transactions drastically and make the entire industry tax-compliant.
TDB: How do you think GST will contribute to the ease of doing business?
RA: GST will cut down interactions with the tax officials at various checkpoints to a great extent. Hence, unnecessary harassment by a certain type of tax mandarin during the goods transit will be a thing of the past. And that will facilitate ease of doing business.
TDB: What kind of cost benefits do you expect the industry to gain with the implementation of GST?
RA: The fixed warehousing overheads of companies across industries will decrease by 30-32% and that will make them more competitive in the international market. Portable and virtual warehousing will become a viable option for many companies. It will also enhance their operational efficiency.
Various unethical practices such as warehousing foods with chemicals, which often leads to rancidity, will come down. In a way, the sector will become transparent operationally.
Moreover, thanks to GST and its simplified tax structure, the logistics sector will be able to attract foreign investments, as various multinationals will take active interest in the Indian market. I think, logistics cost in India which is 1.8 times higher than that of developed countries will become quite competitive. And my assumption is that the sector will grow at 10-12% year-on-year post GST.
TDB: What are the challenges logistics industry is currently going through and how will GST sort out those issues?
RA: GST will make paperwork and other state-level taxation formalities completely redundant, which will help logistics companies to cut down the transit time by 40%. It will make the entire process smooth and hassle-free, devoid of any unwanted officialdom.
TDB: Are you expecting any operational transformation in the sector after GST?
RA: As the logistics industry is likely to adopt a hub-and-spoke model, I think, the industry, especially, the bigger logistics players should come together to form some hubs and gateways in various strategic locations in five key regions of the country – Hosur (Karnataka) in South, Jaipur (Rajasthan) in North, Malegaon (Maharashtra) in West, Asansol (West Bengal) in East and Malkapur (Maharashtra) in Central.
TDB: What is the ideal rate of GST for the sector and why?
RA: I think, GST rate should be 18% in the first year and it could gradually be decreased to 17% and 16% over the next few years. The idea should be to encourage tax-compliance across the country.
A 16-point evaluation of the implication of Goods & Services Tax (GST) on exports
1 The Constitution (122nd Amendment) Bill, 2014 has paved the way for introduction of Goods and Services Tax (GST) in the country. All agencies are gearing up to roll out GST, the biggest indirect tax reform in the country, from April 1, 2017. GST will be a game changer for Indian economy and is expected to increase the GDP growth by about 1-1.5% per annum. It will make India a single market and will facilitate movement of goods across States seamlessly.
2 The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input goods and services, and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost. With complete rebating of all State Taxes and CST, exports will be much better off in the GST regime. However, since electricity duty has not been subsumed in the State GST, the burden of the same will continue on exports which will impact those export sectors which have energy as one of the key inputs.
3 GST is also likely to reduce the logistics cost in India which is one of the highest in the world. The multiple-point warehousing by manufacturers to save on CST will be eliminated. With GST on the anvil, manufacturers can set up warehouses for distribution at select strategic location without looking at the same as tax planning options, resulting in reduced cost of operations.
4 Export sector is worried about the implication of GST on exports. Much of it emanates from the lack of awareness and some grey areas in the Model GST Law. Government is committed to zero rating of exports and the same has been adequately clarified in Section (2) Sub-Section (109) of the Model GST Law. This makes it clear that on exports of goods and services no tax will be payable, but credit of the input tax relating to those exports shall be admissible. There is a little confusion as Section 38 of the Model GST Law talks of refund of taxes on goods and services exported out of India. However, we have been given to understand that the refund facility will be optional for the exporters on the same lines as exists under the Central Excise Act, where the exporter has the option to clear the exports goods without payment of taxes or takes a refund of the duty paid by him.
5 For the input used in the goods/services which are exported, the exporters would be eligible for refund of unutilised input tax credit. With a view to ensure quick refund, 80% of the refund on account of exports of goods and services will be given expeditiously, on provisional basis, while balance 20% will be refunded after due verification of documents. Ministry of Finance has assured instant system based refund upto 80% to address the liquidity concern of the exporters. However, since many States in VAT allow provisional refund upto 90%, GST council should consider to raise 80% limit to 90% to increase liquidity at the hands of exporters.
6 We have received requests from merchant exporters seeking exemption from GST on exports. Merchant exporters are availing such exemption facility from CST against Form-H and VAT exemption against Form C with different nomenclature in different States but since GST would be dispensing with such paper requirement, Government needs to devise some other mechanism to provide exemption to merchant exporters. Some countries have provided exemption to goods procured by principal exporter from sub supplier or job workers. We can also explore the possibility of providing some separate code in the invoice for such supply for exports which may be square off when the proof of exports is supplied online to GSTN.
7 Export Oriented Units (EOUs) may be provided exemption from IGST on their imports while supply from DTA to EOU needs to be treated as Zero rated supply. The EOU scheme has already lost many of its charm and set off of IGST on inter-state supplies will further erode their advantage as EOUs are enjoying refund of CST in the current regime while Domestic Tariff Area units are absorbing this tax.
8 Suitable legislative changes may be required in the SEZ Act to provide exemption from IGST, CGST, SGST on imports as well as domestic procurement of inputs. Section 26 and Section 30 of the SEZ Act would undergo appropriate modification to give effect to the same. Since supply from DTA to SEZ is treated as exports, it should be ensured that zero rebating is available on such supplies. The definition of exports in the SEZ Act is at variance with Model GST Law. We need to synchronise the two to avoid any dispute.
9 GST would also require suitable changes in many of the schemes operated by the DGFT. The categories of the deemed exports would be notified by the government on the recommendation of the GST Council. However, deemed exports is vital to provide a level playing field to the domestic manufacturers supplementing “Make in India” and thus zero rating of such supplies would be a preferred option particularly for those supplies which are exempted from Customs Duty and IGST on their imports.
10 Imports of duty-free capital goods and inputs under EPCG and Advance Authorization will be subject to IGST under the Model GST Law. However, since such goods are primarily for export purposes, exemption from IGST should be provided on their imports so that working capital of exporters are not blocked in payment of IGST. The instrument for domestic procurement for exports like ARO/Inland Letter of Credit/Advance Intermediate Authorization also needs to be given similar treatment.
11 Many of the small exporters particularly in handicraft, carpets, handlooms have represented that since they procure the goods from the unorganised sector, the duty paying documents of input tax credit would not be available with them. To address their concern, government should provide Duty Drawback at two rates: when input tax credit is availed (which will factor only the Basic Customs Duty on imports) and when input tax credit is not availed (which will factor both Basic Customs Duty and input tax credit) on the same lines as available currently in the Drawback Schedule for the CENVAT.
12 The utilisation of scrips and taxation on their supply is also an intricate matter. The MEIS/SEIS scrips will be available for payment of Basic Customs Duty and we will work to explore the possibility of their utilisation against CGST and may be SGST, if state governments agree to the same. Since transfer of scrips are exempted from VAT in few states and subject to 4% VAT in few other states, GST Council should consider to keep them under Section 4(v) of Schedule IV of Model GST Law.
13 The services will get a boost under GST as many of the services have their dependence on a wide spectrum of vendors and suppliers. The complete utilisation of input tax credit and tax only on value addition will address the cascading effect benefitting the sector. The unutilised input credit for the services exports will be fully refunded thereby benefitting such exports.
14 The Merchanting Trade is a new and emerging area of international trade. It has hitherto remained outside the ambit of Service Tax. However, the broad definition of supply may cover certain categories of transactions under GST. Since such transaction are undertaken on razor thin margins, imposition of IGST on them will kill the trade. GST Council should provide exemption to such supplies during the course of imports or exports.
15 The success of GST depends on quick refund of taxes paid by exporters. We have to work in developing a platform which provides instant refund at the time of exports only by integrating GSTN and ICEGATE so that details of exports are captured on real-time basis to ensure such refunds.
16 While there may be few teething problems in the transition, GST will provide full rebate on taxes (except electricity duty) on exports thereby adding to the competitiveness of exports which is basic prerequisite to succeed in global market. GST is a panacea for Indian exports and will help in integrating India in regional and global value chain.
About the author: Ajay Sahai, Director General & CEO, Federation of Indian Export Organisations (FIEO)
(The views expressed here are those of the author and do not necessarily represent or reflect views of The Dollar Business.)
Copyright @2024 The Dollar Business. All rights reserved.
