INDIA’S TAX UNITY FOR TRANSPARENCY – GOODS & SERVICE TAX
Text: Swati Sanyal Tarafdar Photos: Various Sources Illustration: FWD Media
On August 3, the upper house of the Indian Parliament witnessed an eventful day, one that will be remembered for a long time to come. The most significant set of tax reforms in Indian history since 1947 was unanimously accepted at the Rajya Sabha, after seven long hours of heated deliberation and some humour. The Constitution (122nd Amnd.) Bill, 2014, otherwise known as the Goods and Service Tax (GST) Bill, reached a milestone. A unified tax regime is set to begin, hopefully by April 1, 2017, which would improve the ease of doing business in the country and lead her towards a stronger economy.
National and international economists of repute had advised the adoption of a bold tax system for the Indian O economy since as early as the 1990s. As the Chairman of Tax Reform Commissions, Raja Chelliah, the father of tax reforms in India, worked incessantly to eliminate extortionary rates and evolve a simple system with a broad base. The true credit for the adoption of the unconventional reform in India today goes to the people at the helm 16 years ago. In 1999, following recommendations of his economic advisory panel that comprised BimalJalan, I.G. Patel, and C. Rangarajan, the then Prime Minister AtalBihari Vajpayee convened a group of eminent economists to advice on the practicalities of a complete makeover of the Indian tax system. He appointed Asim Dasgupta, then the finance minister of West Bengal, to lead the team that would create the structure of the unified tax system and lay the roadmap to attain it. Dasgupta had a PhD from the MIT and was one of the country’s finest econometricians (statistical economist) at the time. He remained Chairman of the Empowered Committee of State Finance Ministers and the GST team until the Left rule was ousted in West Bengal by the Trinamul Congress in 2011. By then, the structuring of the GST was completed. “We held meetings till 2009 and met over 100 people who are concerned about it. By 2010 we finished eighty per cent of the total work on GST,” Dasgupta had said in an interview.
As this edition goes to print, the Bill has gained approval in both houses of the Parliament, and in 16 state legislatures. It should gain approval in 50 percent of the state legislations, prior to being tabled before the President for his signature, and becoming a law.
Why do we need GST in India?
Consider this report by the World Bank titled ‘’Paying Taxes 2014’’ published in November 2013. It investigated and compared tax regimes across 189 economies of the world between 2012 and 2014 and ranked them according to the relative ease of paying taxes. As per this report, India stood at the 158th position, just above Brazil (159th). China was ranked 120th. The report also shockingly commented that the total tax payable by companies in India is among the highest in the world, to the extent of 62.8 per cent. Compare this with the global total tax rate of 43.1 per cent.
Additionally, companies have to make as many as 33 payments under the head of profit, labour and other taxes, which is higher than the global average that stands at 26.7 payments. For companies within India and for those who are being wooed to invest through sustained campaigning efforts by stalwarts of the current government, this could be the worst piece of information. This is just the opposite of what is being continuously promised to them and the rest of the world in terms of ‘ease of business’. The only sunshine in this report relevant to India’s business scene comes in the parameter pertaining to the time taken to comply with taxation requirements in the country, thanks to a robust and complete online system for filing and paying taxes. The Indian score is 243 hours against a global average of 268 hours and a Chinese score of 318 hours. Incidentally, the United Arab Emirates was in the first place in the ease of paying taxes with a unified value added taxation system as per this World Bank report. Qatar and Saudi Arabia stood second and third in the overall ranking. In October 2014, a similar report by the World Bank improved India’s position by two places. Titled ‘Doing Business Report’, it said the total tax rate in the country can be as high as 61.7 per cent, other parameters remaining same.
The reports published by the World Bank simply represent the complicated structure of Indirect Taxes prevalent in the country, which additionally leads to tax evasion and increased product prices. Presently, the tax system in India includes both direct taxes (example, the income tax) and indirect taxes. These taxes are levied by both the Centre and the states, depending on the items’ inclusion in the administrative list of the governments. Together, the Central and State Governments levy over 15 types of indirect taxes, including the central and state excise taxes, the value added taxes, import duties, the octroi, luxury taxes, sales taxes, entertainment taxes, service taxes, and more. Hence, if India wants to become a stronger player in the global market, it needs a more robust, modernized, and streamlined system of taxation.
In a report, the economists of Morgan Stanley said that “The impetus to move towards GST stems from the inadequacies of the present system and the need for a taxation system which is economically efficient, neutral in its implication, simple to administer, encourages voluntary compliance and, most importantly, integrates India to a single common market.” They further suggests that the implementation of the GST would spike economic growth and public finances, adding, “The overall impact of better allocation of resources, improving efficiency of domestic production and exports is likely to improve overall growth. As per estimates from the National Council of Applied Economic Research (NCAER), growth could increase by 0.9 to 1.7 percent.
Touted to be India’s biggest tax reform, the GST will be collected at the point of sale. People are calling it the opposite of Brexit because it is supposed to unite the country into a single, unified market by replacing all indirect taxes with one tax.
Features of our GST
Under the prevalent tax situation in the country, the industry as well as the common man are facing a losing game. Indirect taxes have to be paid at every step, whenever one buys an item for self consumption, or for processing and manufacturing. If you are an entrepreneur or a manufacturer of commodities, you have been paying taxes on taxes. There have been attempts to incorporate reforms and excise tax policies to reduce the burden of the cascading effects of taxes earlier, but a true solution to the problem of overtaxing would be provided by the GST, which is set to simplify India’s indirect tax structure.
The GST is a consumption based tax, which means, it will be applied on goods and services when a consumer actually buys them. It’ll be collected on value-added goods and services at each stage of sale or purchase in the supply chain. If you pay GST for procurement of goods and services for your manufacturing unit, you can claim your money back through the tax credit mechanism. But if you are the end user, you might have to bear the tax burden anyway, because for you, the GST will behave like a lastpoint retail tax.
In a single or unified GST, the centre might levy taxes and share the revenues with the states. However, India has opted for a dual GST, meaning both the centre and the state governments will levy GST separately, probably on a different list of commodities and services. Countries having a federal structure of governance prefer a dual GST to ensure more independence in sources of revenue, lesser dependence on the central government, and hence lesser conflict between the two levels of governments. The state GST (SGST) will be collected by the state governments, the Central GST (CGST) will be collected by the Central governments, and an Integrated GST (IGST) will be collected by the Central government when goods and services move inter-state.
How is the GST supposed to affect the industry?
The industry feels it’s a little too early to accurately predict how it will be affected by the implementation of the GST in the coming financial year and how the economy will respond to the reforms, but it’s evident that the new tax regime will bring in various long-term economic benefits though just after the implementation, there could be short-lived disturbances in the prices and the rate of inflation. It is common knowledge now that the implementation of the GST will slash the overall tax rates as well as the number of heads of taxation, although the rate at which GST will be implemented is yet to be decided. Hence, in the context of the aforementioned World Bank reports, the country’s tax situation will improve, and so will be the ease of paying taxes and doing business.
Eventually, all these factors will lead to increased competitiveness, cost cutting and optimization of prices. The full and seamless credit system will enable manufacturers and traders to eliminate the tax amount from their cost of production while pricing their products. A better, more economic pricing will also result from the fact that compliance and procedural costs will be highly reduced. This is something the manufacturers are mostly excited about. Their resources will be well utilized, cost and effort of maintenance of records will be reduced.
Some experts are of the opinion that streamlining the taxation system will see more people paying taxes, and the positive environment will increase the governments’ revenues. This behavior was noticed at the time of introduction of the VAT. Exports might increase as a result of the GST because the taxation at destination fundamental will make imports more expensive. Exports would be zero-rated. If goods and services move across states, SGST would apply in the state of destination but not in the state of origin.
Another point the industry is thrilled about is the optimization of the supply chain. In the current scenario, the policies related to inventories and movement of goods and services across states lead to a high cost in warehousing commodities. When the country will be unified by a single rate of tax across states, or a central tax on certain commodities, warehousing will be more economical, based completely on business decisions and not on taxation policies, and the end user will eventually benefit from the rationalization.
The Executive Chairman and cofounder of Flipkart recently wrote in The Economic Times: “Currently , supply chains for e-commerce companies are not optimised but distorted by regulatory cholesterol that prevents us from offering customers the lowest cost or fastest delivery. We are unable to supply goods worth more than Rs 5,000 to UP because our customers have to go to a tax office and complete paperwork. We are unable to keep goods from our 90,000 suppliers in our warehouses across Karnataka due to double taxation. We often face confiscation of goods and cash in Kerala because of their approach to tax domicile, which conflicts with supplying states. With GST, all of this will be history.”
He further adds that “A seamless national supply chain that is agnostic to supply or demand destination is urgent, important and overdue for three reasons. First, it is India’s development trajectory to reduce poverty. Second, it will improve enterprise productivity. Finally, it is about empowering consumers and producers.” After the Rajya Sabha passed the GST Bill, Kaushik Basu, Chief Economist, World Bank opined “By cutting down on transaction costs and double taxation at different points, it will make India a common market. And this can give a big fillip to India’s growth rate in the long run.” However, he also added that in the short-run any effect on prices will be a one-time effect.
Preparing for the implementation
While the major roadblock in India so far in adopting a dual GST was obtaining a common consensus among the states, the coordination among states and the relationship and trust between the centre and the states will remain a hurdle towards setting uniform GST rates, inter-state transaction of goods and services, administrative efficiency, and infrastructural preparedness to implement the new tax reform. As Dasgupta says about the revenue distribution among the centre and the states, the major point of distrust, “It will pan out in the long run. But the time immediately after the Bill is implemented, the states should expect a shortfall. We had provided for complete compensation for the states up to a period of five years. This is something that the Centre needs to be careful about.” Eventually, the gains are shared both by the states as well as the Centre, he explains, adding “We had consulted the National Council of Applied Economic Research and they had told us that a taxation policy such as this is likely to add 1.5 percentage point to the economic growth rate of the country. This will of course depend on rates that are finally decided. But it is possible to give a major push to the economy through the GST.”
Immediately after the passage of the GST Bill in the Rajya Sabha on August 3, Hasmukh Adhia, the Revenue Secretary outlined the GST road-map in a press conference. The date of the implementation has been set as April 1, 2017, and before this period, the legal framework, the IT infrastructure, and the change management should be addressed within tentative timelines for each. The government is keen to meet the deadline and the industry must prepare itself for embracing the transition, which is set to bring in significant change in doing business in India. Advocating best practices, managing changes, and training teams and IT systems towards GST compliance would go a long way in preparing businesses for the new tax regime that starts with the new financial year.
The Kerala Connection
Kerala has the best situation for doing businesses of every kind compared to other Indian states. It’s investor-friendly and comprises great human resource with an advanced society, 100% literacy, and digital know-how. It is proud of its proactive and resourceful industrialists. It also offers one of the best infrastructural framework and is well connected by rail, road, and ports and waterways. The Kerala State Industrial Development Corporation Ltd (KSIDCL) says that “the state provides high international connectivity and instant data transfer facilities. Kerala is one of the only two locations in India where both the optic fibre submarine cables SEA-ME-WE-3 and SAFE converge, giving superb global connectivity at unbelievably low rates”. Dedicated sector-specific industrial parks are being built all across the State to promote core competencies. All these infrastructural advantages and high quality resources make operating costs of business quite low in the state. Hence, with the implementation of the GST, the state can be confident of attracting more investments. Although the industry fraternity thinks that it’s a little too early to comment on how the GST will affect them, it’s probably their modesty speaking. Mostly they also believe that if GST is properly implemented, it will help optimize the supply chain and prevent tax malfunction and corruption. They also believe GST will help organize the informal markets. Here’s excerpt from some of the top businesses of the State.
“With GST, our supply chain costs can come down and become much simpler. Today we operate 35 warehouses across India, which can come down to about 8 or 9. This will have huge savings in inventory, rents and employees cost. This will free up organization bandwidth on more value adding activities. Additionally, it would become extremely difficult to evade taxes and unorganized, unbranded competition in many of our categories will reduce. Many states follow different taxes for the same product and there are a lot of illegal movement of goods across states, spoiling our markets in states where VAT rates are higher. With GST, hopefully this will also stop. However, all these benefits will accrue only if GST is properly implemented.
The banking services which are presently taxed at 14.5% service tax might get a little costlier under the expected GST of 19-22%. This might mean a moderate increase in costs for loan processing and credit card charges. GST is likely to result in increased operating expenses like rent, legal, and professional fees, advertisements, insurance, telecom expenses etc., for banks. However, banks will also be able to set-off their GST liabilities against credit received on purchase of goods such as IT infrastructure and other assets. The implementation of GST will be a big incentive for bringing new investments into India and eventually will foster the growth of the Indian economy, which definitely will result in credit demand which is highly positive for the banking industry.While in the long-run GST is expected to have a positive impact on inflation and government finances, in the near-term, inflation is likely to go up and government finances are likely to be strained. Overall, the bill is expected to have a long-lasting and progressive impact on the economy, enhancing the prevalent business sentiment in the country.
Under the GST regime, inputs and input services will be taxed higher, at approximately 18% or above. Further, there is a statutory reversal of 50% of the input tax credit taken, which is a cost to banks. This will result in an increase in the net expenditure for banks. Currently, India does not levy indirect tax on interest income; only the fee based income such as processing fee, commission, etc. is taxed. When such fee based income is charged inclusive of tax, the net income for banks will decrease. Consequently, banks may increase the fees charged or the lending rates in order to offset the increase in net expenditure or the decrease in net income. Therefore, GST will increase the tax burden and may mean an increase in the cost of borrowing.
GST is expected to drive the overall consumer demand, buying behavior, and may also change the business dynamics. For the auto sector, luxury cars, small cars, compact SUV’s, and Sedans are expected to be the key beneficiaries due to lower taxation. The GST regime is all about unifying the market and accelerate demand. It would help in making our country a globally competitive market for the auto sector. The overall economic activity is expected to boom and we could expect better GDP growth that should push the demand across all category and segment.
Synthite Our factories are spread across the southern India states and thus currently we pay a significant amount taxes on inter-state transport. One big advantage of GST will be the cut down of the inter-state tax, this will stabilize the tax burden for us in the first few years of GST implementation.