GST Bill decoder: Will you benefit from biggest tax reform? Yes (if corporates want you to)

Eight long years after the United Progressive Alliance conceived the Goods and Services Tax Bill, the biggest tax reform is likely to get enacted in the Rajya Sabha on Wednesday.

The NDA government has listed the GST Bill to be taken up and wide expectation is that almost all political parties will come together to pass the much-awaited bill.

In this context, here are the key facts you need to know about the Bill:

What is the GST Bill all about?

 GST Bill decoder: Will you benefit from biggest tax reform? Yes (if corporates want you to)


The Goods and Services Tax Bill intends to convert all states into a single market through a new indirect tax regime, subsuming levies such as excise, sales tax and service tax. In simple words, as brokerage Religare puts it, the tax will “reduce the need for reconciliation at state borders” and could help the country dismantle “the web of check-posts around the country, thereby speeding up the movement of goods”. GST is a destination tax, similar to a consumption tax. It is applied on the goods and services when a consumer buys them. More than 160 developed nations have this tax in place.

What is the GST rate?

The GST panel headed by chief economic advisor Arvind Subramanian had recommended a three-rate structure: 12 percent for goods that are for the poor, a standard rate of 17-18 for most of the items and 40 percent for luxury items.
The general consensus among economists is that the standard rate cannot be more than 20 percent and lower than 16 percent.

Will the consumer benefit?

The simple answer is yes, if coroporates are passing on the benefit they get.

While a section of economists think the benefit for the common man is likely to be minimal, there are others who feel the overall impact will be positive.

MS Mani, Senior Director - Indirect tax, Deloitte in India, explains the benefit for the common man in simple terms: In the case of goods, indirect taxes such as excise, value added tax and central sales tax are embedded in the prices consumers pay. For example, take the case of toothpaste. Suppose the price you pay is Rs 52, around 25-27 percent of this is actually the tax cost. Now, with the GST rate of 18-20 percent, which is being talked about, subsuming the various indirect taxes, the tax cost of the consumer can ideally come down. However, it depends on whether the company decides to pass on the benefit or hold the price high. Companies take pricing decisions based on various factors, including the industry they are in and competition they face.

Madan Sabnavis, chief economist, Care Ratings, is circumspect about this as he thinks generally consumers do not get such benefit. “Usually, there are very few instances where consumers pay less for a good only because tax rate has been reduced. One exception is the auto sector. Here companies reduce the prices in tandem with any tax cut in a bid to attract the buyers,” he says.
He expects the prices of select goods and services to rise initially due to GST but the impact on the inflation rate will be minimal.

Will the corprates benefit?

They will, in more ways than one.

Brokerage Religare sees the GST benefiting corporates in three ways:

a) Double taxation will end. So the effective indirect tax is expected to decline. The corporates pay tax on tax in the present system as there is no input tax credits across the value chain.

b) Seamless movement of goods across states will reduce the “logistics and inventory management costs” of corporate, which are very high in India.

c) Narrow differentials between unorganised and organised players through in-built self policing. “Since input tax credit will be available for all taxes paid earlier in the value chain, firms would require evidence of compliance from the preceding links to claim set-offs. Thus, they would prefer sourcing inputs from compliant firms. This could increasingly bring unorganised players under the tax net, thereby reducing their price competitiveness vs. organized players,” say analysts Jay Shankar and Rahul Agrawal.

According to Mani, as corporates get more of input credits, their net tax cost will go down and as many taxes are subsumed number of compliances they need to do also comes down.

How will the economy benefit?

Economists have predicted a 1.5-2 percent boost for the country’s GDP once the GST is implemented. It will lower the tax and increase the compliance, resulting in higher tax revenue for the government. “Movement of goods will be quicker, simpler and cheaper. That is expected to give a boost to the economy,” says Mani, who expects at least one year before the system settles down and actual impact plays out.

So why is there opposition to this tax?

The answer could be a counter question: Can you implement anything uniform, let alone tax rate, in a country as diverse as India?

It is difficult. That is the reason why there is opposition to this reform.

There is a section of economists, like Arun Kumar, former Sukhamoy Chakravarty Chair Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, who think a common tax rate undermines fiscal federalism. Different states have different requirement, he had told Firstpost.

Tamil Nadu’s opposition to the GST has to be viewed in this context. The government there feels it is not getting a fair deal in this reform. Tamil Nadu is a state which is strong on manufacturing. Such states have a problem since GST, being a destination tax, will result in outflow of tax revenue to consumption-intensive states. The problem has been explained clearly by A Sarvar Allam in this article in the Economic and Political Weekly: "For states with manufacturing industries, sharing the unified indirect tax base with the union government via the destination-based GST, will mean an outflow of tax revenue along with goods and services produced there, to states that consume the goods and services. In this sense, GST provides no incentive for manufacturing states."

The Bill has a provision to compensate the states for the revenue loss for five years. But Allam feels this is just a “rocket booster”. Once this booster runs out, he doubts whether the GST vehicle will help the manufacturing states to return to their present revenue trajectory. “If there is a failure in this mission, with no independent powers of taxation, such states may be left in the lurch,” he warns.

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Updated Date: Aug 03, 2016 11:16:25 IST