GST - A Boom or a Doom?
Businesses across the world are excited as they plan to set up their shop in the fastest growing economy in the world.
Photo Credit : Shutterstock,
History was created on 13th April 2017, when President Pranab Mukherjee signed and ratified independent India’s biggest tax reform – Goods & Services Tax. The bill comes into effect on 1st of July 2017 and promises to unite India as a Union with one tax rate, thereby simplifying transactions across the country. GST Act subsumes several indirect taxes such as custom duty, excise duty, value added tax, service tax, central sales tax, octroi, entry tax, purchase tax etc. and brings them into one common umbrella called GST.
Businesses across the world are excited as they plan to set up their shop in the fastest growing economy in the world. Past three months have seen surge in startups being launched to help businesses and media shows and newspaper articles making people aware of the change. It is also a good time for the accounting firms and tax consultants as they see an opportunity that’s win-win in several ways for them and their clients, however, many are skeptical of the real gains and the complexity of implementation. Businesses are getting new software in place, while smaller players remain concerned about increased compliance requirements. Let us take a look at some of the common points spoken for and against the bill.
For the GST – A Boom
GST, a global standard of unified tax structure in most federal states across the world, is a positive way forward. GST will reduce the administrative and compliance cost drastically for the supply of goods and services by merging around 17 indirect taxes in the value chain.
The biggest beneficiary of the new regime will be the manufacturing and retail industry. While the manufacturers will gain by avoiding multiple taxes and a lower tax rate (approx. 10% lower), retailers who operate PAN India will be saved from the trouble of double taxation. Since goods will move freely from the point of dispatch to the consignee without bureaucratic taxes, corruption and the delays thereof, businesses will be able to plan their inventory and further reduce input costs.
Additionally, the existing indirect tax had involuntarily hindered the growth of the domestic manufacturing sector, apart from adversely impacting the flow of foreign investment sector. The introduction of GST is certain to alleviate such issues. It would not only reduce manufacturing cost from a compliance perspective but also from a tax viewpoint. With this at the background, the GST will certainly boost the Make in India campaign, as it makes India a single large market by freeing from the current mess of several complex levies along the state lines. The enactment of the Bill would eliminate CST and a host of various other taxes would be subsumed into the GST. Furthermore, with its application on imports, the negative protection favoring imports over domestic manufacturing would be eliminated.
The GST is also anticipated to nurture the new-age warehousing and logistics in India. India’s supply chain landscape is about to change from those ill-equipped storage spaces to some neatly stacked, air conditioned and automated warehouses. Putting things into perspective, tax laws have been the base for every warehouse. This means every company had to have a warehouse almost in all states they operated, to avoid central sales tax and state sales tax. However, with GST brining in a uniform tax structure, large format modern warehousing will come up in a big way.
The bill will be beneficial for small traders with a turnover of less than INR 10 Lakh. These traders are exempt from any registration or payments of goods and service tax (GST). This ease of compliance will also reduce the current spend on compliance and expansion. Early Stage startups would be able to utilize this opportunity and grow across the country.
GST benefits e-commerce in a big way. The industry in the past faced several issues landing goods across states with tedious paperwork that deprived customers in some states of the products available in other states. With no entry tax, logistical issues for the industry are sorted completely and vendors will be able to ship across the country.
The make in India will get the boost with many foreign companies making the much awaited move to set up plants in the country. This will bring foreign capital and improve rupee value and employment conditions. It is anticipated that implementation of GST alone will add 2% to the GDP. It is a Diwali for the end consumers, who will enjoy savings of at least 10% on their spend on goods.
GST tracks the value chain, collects tax at the point of consumption and provides credit for the taxes paid at the previous milestone. With the multiple stakeholders from the base to end consumer, government will be able to track the channels used for tax evasions. This will bring transparency in the system.
Against GST – A Doom
Building consensus for the passage of the GST bill was always difficult in the democratic India. Alcohol Electricity and Petroleum products are not covered under GST and will continue to be taxed as per the old system. It is a compromise. The challenge in itself was so big that the final outcome in many ways is no better than the existing framework of multiple taxes. The GST is divided into three parts i.e. CGST, SGST and IGST, which will require businesses to file 3 returns per month or 36 returns per year. Sounds Like the old wine in new bottle – isn’t it? Now consider this on top of it - A service provider such as an insurer will need registration under each state of operation for SGST. Now compare it with the existing service tax charged by the center. The services industry in particular is unhappy about the increased burden of compliance.
While manufacturing in general will gain, SME’s who were exempted from custom & excise duties will have to bear the full burden of tax and this will lead to increase in the prices of the certain products. Since the tax advantage available to SME’s will be off, it is likely that the larger players in those sectors will play dominant and will result in closure of many small units.
GST is based on input credit. Most critics have talked about the flaw when a particular supplier has failed to comply; its customers will not be able avail input credit. Now this has been done to ensure that system enforces compliances, however, with little and no control and information of the counterparty, this will likely lead to misinformation and confusion.
With some Chief Ministers, voicing their discontent, even before implementation of GST, it is evident that there will be conflicts between the states and the center. With no incentive for fiscal discipline, states will invariably show budget deficits, making center responsible for every nuance in the state machinery.
Change is never easy. Let us bite the bullet as GST is a great start in the positive direction. While the debate is on, only time and experience will help us evolve. For a start, it is good to know that 1st of July, India will operate as a single market and that the stock markets are already on Bull Run anticipating growth. The stage is all set and everyone is bound to get a share of it. The headline on Economic Times today reads “Unity among political parties and rollout to be showcased as the unifying force”. The key now is to be GST ready.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
Around The World