Will GST Simplify Tax Rules Or Prove To Be A Nightmare?

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The Goods and Services Tax will benefit consumers and burden small businesses. Along the way, a single market may emerge.

The saying “less is more” aptly describes the impact the Goods and Services Tax (GST) is to have on the Indian economy. Its aim is to replace India’s many taxes with a single one, having multiple slabs.

Aside from demonetisation and the Finance Bill, it is the most significant shakedown the NDA government have laid on the economy. So far, lacking a singular taxation regime, both the Centre and the States have levied their own taxes wherever applicable. This led to a system where manufacturers were taxed to a cascading effect; paying taxes on goods that were already taxed.

Both the government and the consumer bore this burden. Consumers faced multiple taxes levied on a single bill while the government faced a populace that largely avoided paying tax altogether. And the cost inter-state trade was so high (in terms of time and money), that in many cases it was cheaper to import goods than to buy them from a neighbouring state.

The Goods and Services Tax was promised by many governments, with the aim of replacing multiple taxes with a single one. From July 1, 2017, it will be a reality, as millions of merchants across the country switch to the new system.

But fewer taxes are not necessarily adding up to lesser taxation.

The past and the present

The idea of ‘one nation, one tax’ has been in the making since 1986, when Vishwanath Pratap Singh pitched the idea of a Modified Value Added Tax (MODVAT), which made it easier for manufacturers to be reimbursed for the excise taxes they already paid.

Both the states and the centre have the power to impose taxes in India. But the states could not tax services while the centre couldn’t tax goods beyond their point of manufacture.

The system was complex and intricate. The World Bank’s Ease of Doing Business Ranking consistently placed India low for its complex business regulations. In 2016, it evaluated that it takes 241 hours per year to file and pay taxes in India.

You can see the effect of this tangled tax system at India’s state borders, where trucks line up for miles waiting for clearance. It costs companies billions of dollars in revenue in hours wasted in waiting. These trucks can be delayed up to five hours at a time, compared to a global average of five minutes.

Businesses started to import goods from abroad rather than from other states. This adds to India’s trade deficit, doing no good for the local industry.

The GST replaces up to 13 types of State and Central taxes with three – a Central GST (CGST) levied by the Centre, a State GST (SGST) levied by State Governments and the Integrated GST (IGST) levied by the Central Government on goods and services traded between states.

The GST was introduced through the One Hundred and First Amendment of the Constitution of India on December 19, 2014. It was passed in the Lower House of Parliament in May 2015, following which the Upper House deliberated on it until a few amendments were made. These amendments were passed in the Lower House on August 3, 2016.

What will this mean for business as usual?

The Taxman Cometh

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Medium and Small Scale Entrepreneurs (Image: Riyaz Shaik/ 7MB)

Although the original plan was for “One nation, one tax”, this turned out to be un-implementable in India’s diverse setup. Instead, eight slabs have been set up based on the nature of the goods and services. The tax brackets are 0, 5, 12, 18, 28 percent as well as additional slabs for luxury goods, rough diamonds (0.25 percent) and gold (three percent). The higher-taxed items include high-end automobiles and motorcycles, as well as some consumer durables.

The slabs vary by sector, and there is already some confusion over its applicability. For example, curd and lassi are in the ‘zero’ bracket, but yoghurt is taxed at five percent. Besides sparking a debate about whether yoghurt, curd and Dahi are the same things (they are), it raises questions over how these matters will be disputed in the future.

The slabs have taken rural consumption habits into consideration – as more than half of the items in the Consumer Price Index (CPI) are included in the zero bracket. It’s a relief for some consumers, but for those who seek ‘luxury’ items like shampoo and automobiles, you can expect the highest slab.

From July 1, 2017, consumers will adjust their habits and wallets accordingly. But it’s the businesses who will learn that less is indeed much, much more.

Where they once filed just two tax returns in a year, they may now have to file up to 49. If a business operates in multiple states, that number grows exponentially. Being present in just 20 of India’s 36 states would see you file 740 returns each year. All this is to be done under an e-filing system – which one can only hope will be able to handle the load.

The tax net has both widened and contracted for Medium and Small Scale Enterprises (MSME). The excise threshold for manufacturing has been reduced from 1.5 crores to 15 lakhs. But, where the earlier Value-Added Tax and Service Tax applied to businesses with a turnover of five to ten lakhs, the GST pegs the ceiling at 20 lakhs.

Some sectors, like automotive, will face different tax slabs based on the type of vehicle manufactured. But the initial outlook is a reduction from existing tax rates – with several manufacturers already offering “GST discounts“.

The elephant in the room is that the GST is not a singular tax. Every state will have the power to change its tax rate – which could result in a system little different from the earlier.

The GST Council steps into play here. Comprised of members from both the Centre and the States, it will be the go-to point for future negotiations on tax slabs. Any decisions on whether companies receive tax write-offs must be taken by the GST Council (where the Centre enjoys an effective veto power).

For the many entities who have received tax exemptions to operate in India, they will face a review of their terms – the final decision being that of the GST Council. Apple, who have already set up manufacturing plants in India producing the iPhone 5SE, will now await this very decision.

Worryingly, the Minister of State for Electronics and IT, P.P. Chaudhary, had said that existing exemptions will be reviewed by the GST Council. This could have a dramatic effect on Foreign Direct Investment (FDI) in India.

What’s in it for the country?

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Markets across the country will have to adjust to the new prices (Image: 7MB)

The GST is a destination-based tax – meaning it applies in the state where the good or service is consumed. Thus, states that make these goods or services have little to look forward to. But states that consume more can rake in higher tax returns, prompting them to increase their trade.

So far, direct and indirect taxes don’t account for much. Most states make the lion’s share of their revenues through cess on alcohol and petrol. In states like Kerala, Karnataka and Tamil Nadu, alcohol sales account for more than 20 percent of state GDP.

This is why alcohol has been excluded from the ambit of the GST, as has petrol. For now. And the Centre has promised to make up for any revenue losses the states suffer from the loss of earlier taxes. To pay for this, the Centre levies a “GST Compensation Cess” on ‘luxury’ items like tobacco, coal, pan masalas and SUVS to name a few (the full list can be found here).

The idea of the GST is to unify the Indian single market and to increase tax revenues by simplifying the system and reducing the need to evade taxes. Until now, it has been notably easier to conduct cross-country trade in trade blocs like the European Union (EU) and North American Free Trade Agreement (NAFTA) than it is to cross a state with some goods in India.

The actual face of the GST suggests a more intricate system. It’s already one that has industry bodies struggling to prepare for the July 1 rollout. The Federation of Indian Chambers of Commerce & Industry (FICCI) sent a list of proposed amendments to the GST mechanism in August 2016. Their requests included a continuation of existing exemptions and for the government to take a non-adversarial stance on tax regimes.

If they’re still waiting for an answer, one was apparent in May, when the Revenue Secretary Hasmukh Adhia said:

We expect companies to cooperate. We hope we don’t have to use the weapon.

The GST’s present form gives some industry leaders reason to be afraid, while consumers might find a reason to cheer. For the Indian economy, whether the GST is to be a panacea or a weapon will be apparent only at the end of the financial year.

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