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Topical Analysis

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%

  1. TOPICAL ANALYSIS 5: GST NEW ERA OF TAX REGIME
  2. INTRODUCTION TO GST
  3. GST: COOPERATIVE FEDERALISM
  4. GST: MACRO ECONOMIC EFFECTS
  5. ROLE OF IT IN GST REGIME
  6. GST RATE AND ITS IMPLICATIONS
  7. GST: CONCERNS IN NEW REGIME
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