The passage of 122nd Constitution Amendment Bill (CAB) (proposed for Goods & Services Tax (GST)) through the Rajya Sabha marks one of the finest reforms in Indian indirect tax history. The efforts made by the government are certainly laudable as they were able to move so many cabinet amendments overnight. After years of deliberations at the end, as Mr. P. Chidambaram rightly noted, with a unanimous decision on GST, what India got is a Good Sense prevails Tax.
Now that GST has already cleared its ‘most critical path’ in the implementation process, it is pertinent to note that there are many other nitty gritties in GST which may have to be addressed in due time to ensure that GST ultimately turns out to be beneficial for India Inc. Over the course of this article we will be addressing some crucial GST related topics like Revenue Neutral Rate (RNR), challenges in GST implementation and GST impact on few select sectors.
Revenue Neutral Rate (RNR)
The ‘Revenue Neutral Rate (RNR)’ has by far been one among the most actively debated topic by the knowledgeable elites on GST. Implementing GST with an appropriate RNR is extremely crucial for the GST regime. More so because any error in the RNR estimation could negate every possible benefit which GST would offer in the long run. In order to understand the rate band within which RNR could be proposed, let us first study the concept of RNR itself. The report ‘ESTIMATION OF REVENUE NEUTRAL RATE’ by R Kavita Rao and Pinaki Chakraborty aptly explains the RNR with this formula.
Revenue Neutral Rate (RNR) = (Total Tax Revenue) / (Tax base in GST)
In the given formula, the ‘Total Tax Revenues’ (Revenue which government earned from indirect taxes in India) is usually constant as it is easily determinable through statistics. On the other hand ‘Tax Base in GST’ is a variable which may change. Thus a lower tax base under GST will increase the rate of RNR and a higher tax base will decrease the rate of RNR.
Most likely, the GST regime may have four major categories of rates i.e. Zero Rate, Lower Rate (for precious metal), Standard Rate and a Higher Rate (for Luxury goods/services). The RNR will be a cumulative median of all these four rates (and not the standard rate only). Although a lot of factors will need to be factored in (both economically and politically) to evaluate the perfect RNR, but we can expect it to be anywhere between 18%-22%. Given the importance of RNR being able to influence major economic decisions, it is crucial that RNR stay’s stable across all the States. In light of the same GST council should reserve the right to influence changes on RNR from both Centre and the States.
Challenges in GST implementation
Implementation challenges for the Government:
The GST implementation date, April 2017 may only be 8 months away but, there are many hurdles in the process which the government is yet to bridge.
Parliamentary Challenges – Road Ahead
- Acceptance of amendments introduced in Rajya Sabha by the Lok Sabha.
- Ratification of the 122nd Constitutional Amendment Bill (CAB) by 50% of the 29 States and 2 Union Territories with Legislature
- Post the Ratification, Presidential Assent will be required for the CAB
- Next, a GST Council will have to be formed within 60 days of Presidential Assent
- Finally, the CGST Act & IGST Act will have to pass through both the houses of parliament and SGST Act will have to pass through their respective State Assemblies
- Training and development on government employees
- Ensuring that GSTN is up and ready to go live on the said targeted date
- Resolving jurisdictional issues between States and Centre
- Resolving issues of dual control between State and Central authorities
Challenges for the Businesses
- IT Migration from current regime to GST regime
- Training of employees and vendor on-boarding training
- Supply chain restructuring
- Credit transition from current regime to GST regime
GST impact on a few select sectors
Indian pharmaceutical Industry stands out globally as the fourth largest producer of pharma products in the world. The sector currently faces multi-stage taxation i.e., import duty on outsourcing and on import of capital goods, excise duty on manufacturing, CST on inter-state sales, service tax on services availed and other levies from States. Therefore, Pharma sector shall reap benefits under GST Regime. The GST Model law introduces the new concept of refund available to companies with inverted duty structure. This is a welcome change for the Pharma Sector. On the flip side, the Model GST Law fails to clearly address the continuity of Area Based Exemptions which are usually enjoyed by this industry in specific States. A representation to gain clarity regarding the same will be needed. But overall the positives could outweigh negatives for this sector in GST.
Electronic Commerce Sector:
The e-commerce industry in India is likely to be worth USD 38 billion by 2016, a 67 per cent jump over the USD 23 billion revenues for 2015, as predicted by industry body Assocham. Under the Model GST Law, the term `electronic commerce operator` and ‘aggregator’ have been separately defined. The Model GST Law casts an obligation on every electronic commerce operator to collect tax at source and deposit applicable GST when payments are to be made to the supplier. This will increase the onus and compliance burden on electronic commerce operators, as many of them have a large number of vendors. Also, specific e-commerce transactions like e-wallet, gift vouchers, etc., have been left unexplained under Model GST Law.
The fast moving consumer goods (FMCG) segment is the fourth largest sector in the Indian economy. The market size of FMCG in India is estimated to grow from US$ 30 billion in 2011 to US$ 74 billion in 2018. Presently the peak tax costs for industry player’s amount to approximately 27% (i.e., excise duty of 12.5% and VAT ranging from 12% to 15%). Under the GST regime, it is proposed that the revenue neutral rate would be in the range of 18% to 22%, thereby resulting in benefit for the sector. For this sector, it is important to evaluate the taxability and valuation of stock transfers and free supplies.
The Indian auto industry is one of the largest in the world. The industry accounts for 7.1 per cent of the country`s Gross Domestic Product (GDP). The Automobile sector is usually plagued with high values of taxation. Small cars are taxed to the tune of around 38-31%, the sedans are levied tax in the range of 40-44% and the luxury category cars are levied above 47% tax in the current regime. Under the GST regime the RNR is proposed to be anywhere between 18-22%, which will lead to substantial tax savings for this industry in all the said categories. Further, it is probable that GST Rate for luxury cars could be higher than the standard rate under the GST Regime. The said Luxury rate could be pegged at around 40%. Nevertheless, 40% GST rate is still better than the above 47% tax levied at present. Thus overall this industry stands to gain in GST.
Information Technology Sector:
GST shall bring an end to the long lasting litigation aspect for the Information Technology (IT) Sector which rotated around, whether a service provided is ‘goods’ or ‘service’. The Model GST Law is silent on the continuation of various concessional duty benefits currently available to manufacturers under IT Sector. Further, no specific Place of Supply (POS) for Online Information Database Access Retrieval (OIDAR) services in the Model GST law. Therefore the general rule (i.e. POS will be location of registered service receiver) will apply. This will lead to increased compliance in terms of maintenance of registered customer databases, KYC norms, etc. Also, the cost of IT services shall increase due to increase in rate of tax from 15% to the RNR Rate which shall be approximately 18-22% under GST for the normal consumer.
Even though every business has its own dynamic indirect tax structure, thanks to the innumerable levies, exemptions, abatements etc. for brevity sake we could broadly bucket the industry into manufacturer, trader and service provider. A quick number work would tell you that manufacturers and traders could gain under the GST, whereas services providers may have to take a hit by 2-3%. But cumulatively the economy is expected to see a boost of at least 1-2% as per the economists.
As we move towards an almost certain GST implementation in India, an analysis as to ‘how will GST affect your business?’ becomes increasingly important, as indirect taxes are omnipresent present in our transactions. Thus a change in Indirect taxes becomes a direct change in our business.
As it said, there is no standing firm in front of a tide, the idea is to ascend at the right time to let it pass and then stand firm again. It’s about time that the industry embraced the GST tide, and start preparing for the ascend.
(Authored by Pratik Shah-Partner and Lucky Ahuja- Senior Manager at SKP Business Consulting LLP)
The following article portrays the personal views and understanding of the author on the given subject. The understanding of the Model GST Law referred in the article is leveraged from the Model GST Law document made available in the public domain.