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GST: IMPACT ON SECTOR OF THE ECONOMY

The Goods and Services Tax is the biggest tax reform since independence, according to NITI aayog CEO Amitabh Kant GST will help India achieve 9 per cent growth rate. Several experts have also said that GST is estimated to boost GDP by 1-2 per cent and bring down inflation by 2 per cent over the long term.

The Proposed Benefits of GST are:

  • The GST will usher in a nationwide common market and subsume a multiplicity of Central and State taxes.
  • The GST will increase the resources available for poverty alleviation and development.
  •  The GST will facilitate 'Make in India' by making one India. The current tax structure unmakes India, by fragmenting Indian markets along State lines. These distortions are caused by three features of the current system: the Central Sales Tax (CST) on inter-State sales of goods; numerous intra-State taxes; and the extensive nature of countervailing duty exemptions that favours imports over domestic production. In one fell swoop, the GST would rectify all these distortions: the CST would be eliminated; most of the other taxes would be subsumed into the GST; and because the GST would be applied on imports, the negative protection favouring imports and disfavouring domestic manufacturing would be eliminated.
  • The GST would improve tax governance.
  • The Indian GST will be a leap forward in creating a much cleaner dual VAT which would minimise the disadvantages of completely independent and completely centralised systems. A common base and common rates (across goods and services) and very similar rates (across States and between Centre and States) will facilitate administration and improve compliance while also rendering manageable the collection of taxes on inter-State sales. At the same time, the exceptions - in the form of permissible additional excise taxes on special goods (petroleum and tobacco for the Centre, petroleum and alcohol for the States) - will provide the requisite fiscal autonomy to the States.
  • However, in lieu of it, it is important to analyze impact of GST on three subsectors of economy namely, Agriculture, Industries and Services. The analysis of these sub-sectors will help us determine how GST will aid in faster economic growth.

Impact on Agriculture
In the agriculture sector we shall look at how GST will impact cost of agriculture inputs, Supply chain of agriculture products and unification of agriculture in one national market.

a)  Agricultural Inputs
Any input taxes placed on inputs used in the farm sector such as seeds, fertilisers, pesticides, tractors etc, contribute to increase in cost of farm output. On the other hand, farm output prices are controlled by market forces on which farmer has little control. As the input price rises and output price remains stagnant, the farmer will have no option but to absorb the cost, thus increasing his burden. Indian farmer is already reeling under tremendous pressure from many ends and the increased burden of taxes will create a crater in his income. In this context let's look at tax incidence on some major inputs
Seeds - Seeds were exempted both under earlier tax structure and under new GST regime.
Tractors  - The tax incidence on Tractor's inputs combined with VAT on final product takes the total tax incidence for the industry to levels of ~ 12-13%. The fixation of a GST rate of 12% on tractors and on tractor inputs@18% would allow the manufacturers to take credit of the cumulative input duties and taxes. Thus, the total tax incidence on tractors would remain at broadly similar levels and its implementation is neutral for the tractor industry.
Fertilizers - Fertilisers an important element of agriculture was previously taxed at 6% (1% Excise + 5% VAT). In the GST regime, the tax on fertilisers has been reduced to 5%. Thereby reducing cost for farmers
Pesticides - Pesticides currently attract an excise duty of 12.5 per cent. But under GST regime, crop protection products like pesticides are taxable at 18%. So, this might increase tax burden on farmer.

So, by and large either tax incidence under GST regime is similar to incidence under earlier tax structure.

Agriculture Input

Tax burden under previous Tax Regime

Tax burden under GST Tax Regime

Seeds

Nil

Nil

Tractors

12-13%

12%

Fertilizers

6%

5%

Pesticides

12.5%

12%

 b)  Supply chain

One of the major issues faced by the agricultural sector is the transportation of agriculture products across state lines all over India.  Agricultural commodities are perishable in nature in varying degrees therefore trade is influenced by the time required for transportation. The Economist reports that long distance trucks in India are parked for 60 per cent of the time during transportation. Currently, trucks wait outsides for hours to pay taxes on borders of states and cities. These taxes are State entry tax and Octroi. However, GST will subsume State entry tax and Octroi this means seamless movement of trucks. Thus, simple uniform tax regime is expected to improve the transportation time, and curtail wastage of precious food as well as it would ease interstate movement of agricultural commodities which would improve marketing efficiency, facilitate development of virtual markets through warehouses and reduce overhead marketing cost.

c)   Agriculture Trade
The taxes applicable on agricultural trade vary from state to state. The degree of market distortions on account of variation in the levy of market taxes/cess applicable on different commodities in different states are presented in Table below: 

Sr.

Name of the

 

Sales Tax

No.

State

 

 

 

 

1

Andhra

All Commodities (except Maize,

 

Pradesh

Jowar, Ragi, Bajra, Coarse grains) 4 %

2

Assam

All commodities (except rice, wheat, pulm,

 

 

f&v, fish, gur, atta, maida etc.)-4-8 %

3

Delhi

F & V- nil Oilseeds-3 % Methi-7 %

4

Gujarat

1.Spices --3%, 2.Aniseed-- 2%, 3.Cotton

 

 

--4%, 4. Isabgol—2 %, 5. Cummin-2%,

 

 

6. Ajwain—2 %

 

 

 

5

Goa

1.Betelnut –2%

 

 

2.Cashewnut – 2%

 

 

Coconut, F&V, Cattle & Milk exempted

 

 

from Sales Tax

6

Haryana

F&V – nil, Food grains—4 %

 

 

Pulses—4 %, Oilseeds—4 %

7

Karnataka

1.Foodgrains-nil

 

 

2.Pulses -2% 3.Oilseeds-4%

8

Rajasthan

F & V—nil, Foodgrains—4 %

 

 

Pulses & Oilseeds—2%

 

 

Coarse grains--nil

9

Uttar

Foodgrains-4 %

 

Pradesh

Pulses-2 %

 

 

Oilseeds & Others- 4 %

The implementation of GST is a move towards making One National Agricultural Market on account of subsuming all kinds of taxes/cess on marketing of agricultural produce.

Impact on Industries
Industrial sector mainly consist of Manufacturing, Construction, Mining and Utilities (electricity, gas water etc.). Manufacturing is the main sub-sector among these and we shall analyze the impact of GST on Manufacturing.

The share of Manufacturing in GDP is stagnant at 16%, however the share is 42% in China. Some of the reasons for such a low share are multiple indirect tax legislations which have led to significant compliance and administrative costs, classification and valuation disputes. So, tax reforms are critical and necessary to give a boost to an already flagging sector.
There will be reduction in tax burden on majority of manufactured goods post GST implementation. A look at important components of manufacturing like automobiles sector reveal that effective tax rate would reduce in Automobile sector the biggest benefit would go to SUV segment. Under FMCG, by and large tax burden would reduce. The biggest relief would be in Soap and Hair oil segment. 

Automobiles

         

Segment

Total pre GST rate

GST

Cess

Effective GST

Change

Two/ three wheelers

30.2%

28.0%

0.0%

28.0%

2.2%

Mid Segment Cars

47.3%

28.0%

15.0%

43.0%

4.3%

Sports Utility Vehicles

55.3%

28.0%

15.0%

43.0%

12.3%

Commercial vehicles

30.2%

28.0%

0.0%

28.0%

2.2%

       

 

FMCG

         

 

Segment

Excise

VAT

Total pre GST rate

GST

Change

 

Soap
Shampoos
Pastries and cakes^
Waffles and wafers coated with chocolate^
Milk
Ghee
Butter
Hair Oil

12.5%
12.5%
6.0%
12.5%
0.0%
0.0%
0.0%
12.5%

13.5%
13.5%
6.0%
6.0%
0.0%
13.5%
13.5%
13.5%

27.7%
27.7%
12.4%
19.3%
0.0%
13.5%
13.5%
27.7%

18.0%
28.0%
18.0%
28.0%
0.0%
12.0%
12.0%
18.0%

9.7%
-0.3%
-5.6%
-8.7%
0.0%
1.5%
1.5%
9.7%

 

Some other aspects of GST which will add to competitiveness and ease of doing business of manufacturing sector are as follow:
a)   Correct Valuation of goods - Currently, various pre-packaged products for retail consumption are subject to excise duty not on the ex-factory transaction value but on a specified percentage of the maximum retail price (MRP) printed on the package.  The MRP based value (which is usually between 30%-35% of the MRP) is in most cases, much higher than the ex-factory transaction value leading to a higher excise duty liability than would otherwise be the case. This increased excise duty itself, results in a higher MRP, ultimately leading to a higher cost burden for the consumers.  Under the GST regime, GST is payable by the manufacturer at the transaction value, and is creditable for all subsequent resellers up to the final consumer. Accordingly, the unnecessary tax burden of the MRP regime will no longer be relevant.

b)   Reduction of cascading taxes - Under the present indirect tax regime, Central taxes cannot be set-off against State taxes and vice versa. This often leads to a situation where manufacturers are unable to set off excess credit of central or state levies. Further, central sales tax paid on inter-state procurements is also not creditable and are costs for the company. Another issue is the cascading of taxes at the post manufacturing stage. Dealers, retailers etc. are subject to taxes on their input side which are not creditable (service tax on input services, excise duty on capital goods). This leads to an increase in the cost of goods, ultimately affecting the competitiveness of Indian manufactured goods vis-à-vis imports.
 All of the above issues are addressed under GST, which permits tax set offs across the production value-chain, both for goods and services. This will result in a reduction of the cascading effect of taxes and bring down the overall cost of production of goods.

c)    Formalization of Manufacturing - Input credit is proposed to be allowed only if the details declared by a taxpayer matches with the details declared by vendors in their returns.

This will incentivize vendors supplying to manufacturing firms to move from informal to formal sector, because if they are in informal sector and do not furnish bill to their customers i.e. manufacturing units then these units will route supplies from those vendors which provide bills.

d)   Reduction of classification disputes - Currently, due to varying rates of excise duty and VAT on different products, as well as several exemptions provided under excise and VAT legislations, classification disputes are a regular cause for litigation under both central excise and VAT, especially for the manufacturing sector. It is expected that the inception of GST which is based on the principles of a simplified rate structure and minimization of exemptions will significantly reduce disputes regarding classification of products.

e)   Supply chain restructuring based on economic factors - Current supply and distribution models are structured to optimize indirect tax impact arising at various levels of value addition. Transition to GST should hopefully result in such decisions being taken to optimize business efficiency (as opposed to indirect tax efficiency). For Example- currently warehousing choices are often based on arbitrage between VAT rates in different States/ between applicable VAT and CST rates. With the advent of GST, it is hoped that such warehousing and logistics decision would be based on economic efficiency such as costs and location advantages vis-a-vis key customers.

Impact on services
Services sector accounts for 60% of GDP (2013-14) and contribute to 70% of overall yearly GDP growth since 2011-12. A adverse impact of new tax regime may sub-due overall growth of Indian economy on the other hand gains from new tax regime shall boost overall growth. The assessment of Risks, Opportunities and challenges are as follow:
a)   Risks - The government has unveiled a four-tier GST rate structure for the sector - 5 percent, 12 percent, 18 per cent and 28 per cent. The bulk of the services will, however, be taxed at  18 per cent. The sector is currently taxed at 15 per cent, so the GST regime will likely increase tax incidence for this sector. Economic principles tell us final output sold might show slow growth due to increased prices. This may be a bad news given that services sector is not doing well because exported oriented part of services like business process and IT industries are showing decelerated growth due to protectionist stance in Advance economies including USA.

But, services sector also include Public administration and defence which might see tremendous growth on account of increase in tax revenue, enhancement of tax base and ease in tax compliance.
b)   Opportunity - Under GST input credit would be available for goods purchases as well as services which enter the production as services like transportation services. This treatment of service inputs shall have atleast two distinct effects. First, as producers could get tax credit for service input it will automatically reduce prices of goods. Secondly, outsourcing of services will increase, as input tax credit will be available for services many services in the production process which are produced by producer themselves will now be outsourced to third party. These third parties will provide services at a cheaper cost as compared to in-house production by producer due to economies of scale and division of labour. Thus, price of final products shall reduce because of cheap service inputs.
c)    Challenges - A four-tier tax slab and differential rate between the goods and services sectors may distort/influence business by providing arbitrage practice. For example, if a car is taxed at 10 per cent and leasing rates are at 18 per cent, we may have a situation where car sales could be replaced by car leasing. In the area of composite services, a contract may be specially designed to avail the lower rates on services. Therefore, there are implications in the area of dispute management.

On Taxation system
Both the CENVAT and the State VAT have certain incompleteness. The incompleteness in CENVAT is that it has yet not been extended to include chain of value addition in the distributive trade below the stage of production. It has also not included several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges etc. in the overall framework of CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/dealers. The introduction of GST will not only include comprehensively more indirect Central taxes and integrate goods and services taxes for set-off relief, but also capture certain value addition in the distributive trade.

Similarly, in the present State-level VAT scheme, CENVAT load on the goods has not yet been removed and the cascading effect of that part of tax burden has remained unrelieved. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which have still not been subsumed in the VAT. Further, there has also not been any integration of VAT on goods with tax on services at the State level with removal of cascading effect of service tax. In addition, although the burden of Central Sales Tax (CST) on inter-State movement of goods has been lessened with reduction of CST rate from 4% to 2%, this burden has also not been fully phased out. With the introduction of GST at the State level, the additional burden of CENVAT and services tax would be comprehensively removed, and a continuous chain of set-off from the original producer's point and service provider's point upto the retailer's level would be established which would eliminate the burden of all cascading effects, including the burden of CENVAT and service tax.  This is the essence of GST. Also, major Central and State taxes will get subsumed into GST which will reduce the multiplicity of taxes, and thus bring down the compliance cost. With GST, the burden of CST will also be phased out.

On common consumers

With the introduction of GST, all the cascading effects of CENVAT and service tax will be more comprehensively removed with a continuous chain of set-off from the producer's point to the retailer's point than what was possible under the prevailing CENVAT and VAT regime. Certain major Central and State taxes will also be subsumed in GST and CST will be phased out. Other things remaining the same, the burden of tax on goods would, in general, fall under GST and that would benefit the consumers.

Conclusion
GST will not increase the tax burden drastically, and in many cases total tax burden will decline due to removal of cascading effect replacement of gamut of tax systems by one tax systems. The biggest gain shall be from increase in competitiveness and ease of doing business which GST brings with it. The overall impact is expected to be positive on economy thereby increasing the overall economic growth.

 

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