After years of debating point and counterpoint, the long awaited Goods and Services Tax (GST) Constitution (Amendment) Bill finally cleared the last major hurdle when Rajya Sabha voted in favour late into the evening of 3 August 2016.
This sets in motion a major economic reform that will make India a ‘one nation one tax’ economy. The industry and trade has been demanding this crucial reform that will finally make India truly a single tax-unified market.
Not a done deal yet
Most political parties in opposition have been demanding that both the Central GST Bill and the Integrated GST Bill, be introduced in both houses as a Finance Bill and not a Money Bill, since a Money Bill can be passed through a simple majority in Lok Sabha. They want the option to debate it further.
FM Arun Jaitley, however, was non-committal, saying that the GST Council was yet to be formed and the proposed GST Bill still to be drafted.
The government also had to cede to Congress demand for withdrawal of 1% additional cess that was proposed earlier. Former finance minister P. Chidambaram wanted to cap the maximum GST rate to 18%, but Arun Jaitley was again non-committal on this, as many states were pushing for a higher GST rate.
For the first five years of introducing GST, the centre will compensate the states for any loss incurred on account of lower than current tax collections. At present, tobacco, alcohol and petroleum products are being kept out of GST.
Indian indirect tax regime will no more or less be on par with developed countries. Most developed economies have a uniform rate between 15%-20%, whereas India will most likely adopt a GST regime between 18%-20%.
What next before GST becomes a reality
The Constitution Amendment Bill will now be referred to the President who will then send it to Lok Sabha for scrutiny. Post that, the President will send it to respective state assemblies for ratification. It will have to be ratified by minimum 15 state assemblies out of 29. Once this is ratified by state assemblies, the President will give his consent.
The new GST Council will then be entrusted to make recommendations for a draft GST Bill and send it to the central government. The Centre will draft a Bill and send it to the Parliament. Depending on whether it is a Finance or Money Bill, Parliament will debate and then pass the Central and Integrated Bills. Meanwhile, the states too, will have to pass their GST Bills. It will then once again go to the President for his final consent before becoming law.
Objective of GST Bill
The proposed GST Bill aims to provide a uniform and transparent indirect tax regime in the country that will improve ease of doing business, widen the tax base and increase tax revenues, improve compliance, remove multiple tax structures, ease filing of tax returns by businesses, reduce inflation and increase overall GDP.
The new GST regime will subsume over 17 indirect central taxes like excise duty, countervailing tax, service tax, and state taxes like sales tax, VAT, octroi and luxury tax.
Expected benefits of GST
- Reduce retail price for most goods
- Enhance GDP by anywhere between 1-2%
- Reduce inflation in the long term
- Create more jobs
- E-commerce to get a boost by increasing market penetration
- Increase indirect tax collection from a wider base
- Shift emphasis from indirect tax to direct tax collection in the long term
- Increase in Foreign Direct Investment and improvement in international investor confidence
Biggest Sector-wise Gainers and Losers under GST
While most manufactured goods will see prices drop which in turn will see increase in demand, some services are likely to see an increase in costs, where consumers will end up spending more. Here is a sector-wise snapshot of the biggest gainers and losers.
With ‘Make in India’ gaining ground along with rapidly increasing e-commerce, companies involved in logistics are likely to be gainers. Companies like Container Corporation of India, Interglobe Aviation, Allcargo, Aegis logistics, Adani SEZ, Gujarat Pipavav will receive a boost.
Small car manufacturers like Maruti, Hyundai and Tata Motors and 2-wheeler companies like Hero Motors, Eicher, Bajaj Auto will be big beneficiaries as costs are likely to drop significantly.
Large FMCG companies like Hindustan Levers, P&G, Godrej and ITC are likely to benefit a lot from lower taxes and logistics cost.
Most companies in this sector will benefit from lower taxes and logistic costs. White goods manufacturers, electrical appliances etc are mostly expected to benefit.
Being a major input to the infrastructure industry, most cement companies have been witnessing an upsurge in demand. With GST, lower costs will see a further increase in demand and lowering of overall cost of infrastructure in India.
Luxury car manufacturers
Luxury cars are going to become costlier thereby adding to the pressure of the existing low sales.
Mobile phone buyers will now have to pay more for their phones.
Eating out is now going to cost more hitting the salaried class the maximum.
Branded jewelry will become more expensive hitting companies like Titan that are already suffering due to high cost of gold imports.
Most pharma companies are likely to see an increase in indirect taxes with consumers having to pay more than existing prices.This is likely to see protests in coming days.
With sale of electricity being kept out of GST, the cost to companies using coal-based power and renewable energy are likely to see an increase in costs.
Oil and Gas
Aviation Turbine Fuel, high speed diesel, crude oil and other petroleum products excluded from GST will see a rise in costs, if dual indirect taxes are not removed.
Challenges to smooth transition to GST regime
In 2013, a new Goods and Services Tax Network (GSTN) was established and entrusted with the responsibility to create and maintain the massive IT infrastructure required to maintain the GST backbone.
With 29 states and 7 Union Territories, it will be no easy task to transition existing businesses to a single seamless integrated platform that can efficiently manage the registration process, return filing and monitoring, and settlements to tax payers.
The problem is the existing gap between IT infrastructures of various states that operate on separate platforms and vary in technical complexity. Besides IT infrastructure, personnel across states will have to be trained on the new platform and that will be a challenge, given the disparity in quality of IT personnel and the limited time to upgrade their skills before GST goes live.
With the government aiming to implement GST from 01 April 2017, GSTN has a major challenge at hand.
GST Rate Structure
What is GST: How will it change India
Swachh Bharat Cess on Service Tax
What is Krishi Kalyan Cess?
Corporate Tax in India
Black Money in India
Top 5 programmes launched by Modi
Land Acquisition Bill
What is GST?
How to register for GST?
Various Goods and Services Tax forms
GST Rule Changes
Implementation of the GST in India
Costlier Or Cheaper Under GST?