Decoding GST For Individual Investors In These Days Of Confusion

By the time you are reading this report, much-awaited and much-hyped new set of laws related to GST may be a reality considering all the political activities roaring across the power corridors in the national capital since early July. To ensure a smooth passage of the controversial Bill in Rajya Sabha, politically opposed by many, country’s Prime Minister, Narendra Modi himself has been taken initiatives to call it a truce with his political foes. On July 19, it has been learnt that the government has even decided for a 9-hour long marathon session in the upper house of Parliament only to discuss GST and mend ways to let it finally turn into a law. Meanwhile, stock markets in India have been eagerly awaiting that golden moment and so are the individual investors. It is considered that GST remains the major domestic trigger for the Indian capital markets but meanwhile, there are lots of confusion over how GST may impact various sectors and eventually stocks of several companies. In this report, we have made a sincere attempt to cover majority of the aspects of GST for the interest of individual investors.

GST across globe

Worldwide, there are almost 150 countries which have introduced GST in different names but the character of the law remains almost similar. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. 

Country	GST Rate in %
Australia	10
France	19.6
Canada	5
China	17
Germany	19
Mauritius	15
Japan	5
Singapore	7
Sweden	25
New Zealand	15
South Africa	14

Impact on Tax system

Taxes which will be subsumed in GST

Central Taxes subsumed under GST                               State Government Taxes subsumed under GST

Central Excise Duty (including additional excise duty)               Central Sales Tax

Service Tax                                                                                           Octroi & Entry Tax         

Additional Customs Duty                                                                   Purchase Tax

Special Additional Duty of customs Luxury Tax                             Taxes on lottery, betting and gambling

Central surcharges and Cess                                                             State Cesses and Surcharges

                                                                                                                Entertainment Tax
Value Added Tax

Exclusions from GST bracket

Sectors which are excluded from the GST bracket are, petroleum, land component of real estate, the interest component in the financial sector, electricity, gem & jewellery, education and health services and also agricultural produce.

What does GST mean to stakeholders?

A.  Benefits of GST to business houses

The traders in the supply chain will get benefit from the proposed GST laws as it will reduce complexity of taxation processes. The transaction cost will sharply fall and facilitate seamless movement of goods across the states.

In the GST system both central and state taxes will be collected at the point of sale and will be charged on manufacturing cost. This will benefit the consumers as prices are likely to come down. Going forward, lower prices will lead to increase consumption. The incremental consumption cycle will boost demand for products which will benefit companies.

GST will improve ease of starting and doing business. Once the GST law is implemented, the companies won’t need VAT registration from the states’ sales tax department. It is good for the export-oriented businesses as it is not applied for goods or services which are exported out of India.

B.  Narrowing differentials between unorganised & organised players

In the GST system the input tax credit will be available for all taxes paid earlier in the value chain. After that the companies would require evidence of compliance from the preceding links to claim set-offs. Thus, they would prefer sourcing inputs from compliant firms. Further, it could increasingly bring unorganised players under the tax net, thereby reducing their price competitiveness verses organised players.

C.  Benefits of GST for consumers

Being lower tax rates, the prices for goods and services will be lowered after implementing GST. The government may spend more on infrastructure which will ultimately benefit the entire population. There will be more funds collected in the form of GST. If government receives more revenues then ultimately the money will be spent on development which will, in turn, improve the living conditions of the citizens.

Impact on macro factors

After implementation of GST, inflation could be lower in India as goods account more than 70 per cent of the CPI basket and attract effective 25 per cent tax which is more than the GST rate that India is likely to pick. The GST is highly likely to boost India’s indirect tax to GDP ratio; it will bring the unorganised sector which is more than 50 per cent under the taxation bracket.

It will also boost export growth which in turn drive down country’s CAD. GST implementation is also likely to increase direct tax collections, as GST payments by tax-payers will be linked to their respective Permanent Account Number (PAN). The National Securities Depository Limited (NSDL) which maintains the Tax Information System (TIN) will also look after the GST database.
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Better operational efficiency

India has complicated web of check posts in places across and within all the states, which act as physical barriers to trade in the country. Post GST implementation, there will be unified movement of goods across the country. As per a World Bank report, the cost of logistics is relatively high in India and ranges over 10 per cent of net sales for auto components, 14 per cent for electronics. The global practice for logistics is approximately 3 per cent of net sales for auto components and about 4 per cent for consumer durables.

Major transportation in India is carried out by using trucks. Major reason for freight delay is state border check-post clearances. The average speed of a truck on a highway is just about 20 to 40km per hour and trucks travel just 250 to 300 kms per day in India. This raises costs due to higher inventories and locational inefficiency. The World Bank estimates that as much as 60 per cent of the journey time, the truck is not moving, with 25 to 30 per cent of the time spent at check posts, state borders and city entrances. Thus, regulatory disorders increase truck travel time as over 650 checkpoints slow freight traffic at state borders.

Delays due to road blocks, tolls and other stoppages could cut freight expenses by about 30 per cent and logistics costs by 40 per cent. This would translate into a gain of approximately 3 to 4 per cent of net sales for key manufacturing sectors.

GDP math

According to National Council for Applied Economic Research (NCAER), GDP of India will remain in range of 1 per cent to 2 per cent. India’s GDP growth will be unaffected in the short run due to GST. There are limitations for growth of GDP as exclusion of alcohol & petroleum products from GST regime and additional 1 per cent interstate tax to compensate the producing states. The interstate tax of 1 per cent recommended to compensate the manufacturing states is likely to disturb potential gains from unified tax.

The GST Revenue Neutral Rate (RNR) would be in the range of 18 per cent to 27 per cent. Meanwhile, there are still discussions going on what will be the final GST rate. Considering two scenarios as RNR at 18 per cent and 25 per cent impact on tax and GDP will be given as mentioned below.

		Indirect tax (Rs trillion)	Direct tax (Rs trillion)	Total tax to GDP Ratio	Change in total tax to GDP Ratio
	FY14	13.5	6.8	17.8	NA
GST Revenue Neutral Rate	18%	13.5	6.8	17.8	0
	25%	16.4	6.8	19.7	1.9

At GST of 18 per cent, there will be no incremental gain in tax revenues for the government. Also, at this rate, it will be positive for goods, as currently the effective tax rate on most goods is approximately 24 per cent. However, it will negatively hurt services consumption, as currently the service tax rate is 14 per cent. Therefore, GST is unlikely to have a material impact on GDP growth, as there will be no incremental gain in tax revenues, which could shoot capital expenditure by the government.

A GST of 25 per cent, the government’s tax-to-GDP ratio will receive a 1 per cent to 2 per cent point boost. Assuming that the incremental tax revenue is expended on capex, this will have a positive impact on GDP growth. According to NIFP, the incremental government expenditure will be magnified through the fiscal multiplier for capital expenditure which in India’s case is roughly 2.45.

IT platform – Goods and Service Tax Network (GSTN)

Goods and Services Tax Network (GSTN), a non-government private limited company was incorporated on March 28, 2013. Government of India holds 24.5 per cent equity in GSTN and all states and Empowered Committee of State Finance Ministers (EC) together hold another 24.5 per cent. Balance 51 per cent equity is held by non-government financial institutions. The company has been set up primarily to provide IT infrastructure and services to the central and state governments, tax payers and other stakeholders for implementation of GST.

GSTN has the mandate of developing, approving and setting up of an IT architecture of the common GST portal and related IT systems. The IT framework will have common portal providing 3 core services (registration, returns and payments). There will be PAN-based registration number which will be simple for tax payers. GSTN will act as uniformity of policy administration. This will also enable digitisation and automation of the whole chain. Further it will reduce tax leakages tools such as matching the input tax credit. The tools of data mining and pattern detection will deter tax evasion and thus increase collections.

Post GST: India will be a favoured destination

According to a study done by committee of GST, the GST productivity ratio would be 0.51, GST collection efficiency ratio would be 0.6. Meanwhile, the average collection efficiency is about 0.6 for high income countries and 0.57 for emerging market countries, and 0.31 for low income countries.

As per the draft GST report, advantages of the GST will get to the states which having dense population. In current tax structure the exporting states are getting tax on the exports quantity, but as per the GST the importing states will get the tax on the quantity. As per this data, we framed three categories like positive, negative and neutral impact on the states.
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“Cong has its own agenda to destruct the House”

Spokesperson of ruling BJP in the Centre, Shaina NC believes GST law will soon be a reality, no matter how much Congress opposes it. Excerpts from her interaction with DSIJ.

1.  If the GST Bill gets implemented soon it will benefit the country. Which are the states do you think will benefit the most?

Ans: All states except the one’s who are viewing it from their own individual tax review, states like Maharashtra, Uttar Pradesh, Gujarat, Madhya Pradesh, Rajasthan will benefit. All regional parties are backing the reforms apart from Congress which is making it an ego issue.

Tamil Nadu has opposed the Bill stating that the Bill if implemented would be huge loss to state? What could be a prospective solution for this debate?

Ans: States should not see it from the own perspective but should look at the national interest as well, congress which drafted the proposal when in power has suddenly became non committed on the negotiation.

Who are the major stakeholders who will benefit from the GST? Can you elaborate on the same?

Ans: Every citizen of the country, I can’t even distinguish please understand the GST reform is a breakthrough and I can’t understand why the congress is blocking a reform it had agreed on in the past. The major advantage of GST you and me both know. It will replace the tangle of tariff imposed by the centre and different states. The Finance Minister Shri Arun Jaitley has presented so many times that it is the most important tax reform in decade. Most heavy weights have supported the Bill, Mamata Banerjee of TMC would not have supported but has also supported when the PM met all its coalition and urged them and told them that the GST should be passed because a support of the party shows their intent for financial reforms in the country.

The stance of the opposition has been to cap the GST rate at 18 per cent and make the rate a part of constitutional amendment which means every time the rates are to be revised it should be amended. Your take on this.

Ans: Congress wants 18 per cent as an upper limit, but it wants the removal of the proposed 1 per cent state levy and it has called to set a powerful council on the revenue sharing between the centre and the state. It is willing to accommodate most of the changes, but it pointing out the tax rate in a constitutional amendment is a not advisable as it will have to be amended each time it is to be revised.

GST has two components- the Centre and the state and Bill will equally empower both. However, how valid is the argument that GST will hamper state revenues?

Ans: Even if it hampers that is preliminary from the long term it has so many benefits. Congress has its own agenda of destructing the House which is evident to prevent the legislation from being passed, but this is not the political controversy. Congress is more inclined to have a debate on violence in Kashmir is only to deflect. Kashmir issue must be discussed, but the Congress is just trying to deviate from GST. 
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Modi govt. has to be responsive to our concerns for GST passage in RS: Tharoor

Chairman of Parliamentary Standing Committee on External Affairs and former External Affairs Minister, Dr Shashi Tharoor in an exclusive interview with Arshad Hippargi tells the tale behind his party, Congress, opposing GST Bill in Parliament.

It looks like the GST Bill may be cleared in the monsoon session. What is your take on the latest situation as your party has been opposing it?

It will be cleared provided the government is responsive to our three basic concerns: the elimination of the outrageous 1% extra for producer states, which guts the heart of the single-market concept embedded in the GST; the need for a cap on the GST rate; and the need for a satisfactory dispute-resolution mechanism. Once the Bill is passed, implementation will still take a while. There is a GST Council that will need to be formed, which will come up with recommendations on GST rates. Each state legislature will have to pass its own legislation on GST, and there are a number of related processes that need to be followed. My guess would be that all of this cumulatively will take at least a year and perhaps two years from the date of passage. The important thing is that that the ruling party must now act with a little more statesmanship and move away from petty politics which has held up the passing of this bill.

If the Bill gets implemented soon it will benefit the country, however which states do you think will benefit the most?

The benefits will be spread out, but yes the states that the GST bill calls “importing or consumer states” – Kerala, Chattisgharh, Jharkhand, the North Eastern seven—would stand to gain substantially. But, the benefit is not likely to be very significantly higher than other states. What the GST bill does, (or did in its original intent) was to bring the country to a uniform system of tax collection and distribution. However, pandering to BJP governments in Gujarat and Maharashtra, which claimed that, as ‘producer’ states, they would lose out from a GST, Prime Minister Modi has revised the bill to grant states the right to levy an additional 1% tax on outgoing goods. And yet the Bill already provides for states to be compensated for five years for any loss of revenue from the application of GST. It defeats the purpose of the entire Bill which was to not to distinguish taxes between states.

3.  GST certainly has economic benefits; how will it contribute to GDP?

According to a Finance Commission report, the GST in its original form, as introduced by the UPA government, could have increased the GDP by 2-2.5% and exports by 14%. But the BJP government has introduced a number of exemptions. By omitting alcohol, tobacco, petroleum products, and electricity – which together account for more than a quarter of all tax receipts – the government is significantly diluting the GST’s potential impact on the national economy. Overall, the current government’s gutted version of the GST would, by some estimates, not have any measurable effect on GDP at all.

Who are the major stakeholders who will benefit from the GST? Can you elaborate on the same?

It is businesses and consumers. India’s multiple taxes and tax authorities create ample opportunities for corruption and tax-avoidance. A national GST would eliminate these problems. For businesses, particularly those that have to transport goods across the country, the GST would ease logistics. Consumers are likely to benefit as it will bring down the prices of products by removing double taxation.

The stance of the Opposition has been to cap the GST rate at 18 per cent and make the rate a part of constitutional amendment, which means every time the rates are to be revised it should be amended. Don’t you think it will be a cumbersome task?

India’s system of governance rests on the belief that an integrated process of bargaining, disagreement, reflection, and compromise is the most effective route to wise, fair, and successful policymaking. It could be seen as cumbersome, but it prevents the Centre from exploiting the lack of a cap as and when it pleases, and gives States a certain degree of protection. In a report the National Institute of Public Finance Policy suggested that GST could even amount to as high as 27%. Such numbers would be a recipe for non-compliance and tax-evasion. If you want a GST that works and is acceptable to all, it should be capped at a reasonable level and further amendment should not be permissible except in the extraordinary circumstances that a constitutional amendment implies.

GST has two components; the center and the state and the Bill will equally empower both. However, how valid is the argument that GST will hamper state revenues.

The Bill gives the state legislatures powers to levy their own GSTs. It only states that the laws be uniform across state. So states have a right to choose the amount of tax they want to levy. Having said that, part of the idea behind the GST is to remove double taxation and in doing that naturally, the state revenues will fall. However, a more streamlined tax system, which the GST also seeks to bring, will improve the tax collection base, and ultimately the states will be transferred the benefits.

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Sectors view

1.  Automobiles

There are heavy taxes on automobile manufacturing industry having effective tax rate of 24 per cent for small cars and 38 per cent for luxury cars. Post GST, the sector will likely to have lower effective taxes which will reduce pricing and profitability margins going forward.

2.  Cement

The major inputs for the sector include limestone, gypsum, coal, and fly ash. The facilities are usually located near limestone mines; gypsum/coal is purchased either locally or through inter-state transactions. The aggregate effective indirect tax in the industry is about 24 per cent. After GST implementation the effective rate will be lowered, thus lowering the price of cement for the end consumer.

3.  FMCG

The main inputs for this sector, excluding cigarettes and alcohol, are edibles (wheat, flour, and sugar), palm oil, caustic soda, flavours and fragrances, amongst others. As cascading impact of taxation there is approximately 24 per cent tax burden on the sector. With a low rate GST, the sector will benefit from reduced price of the final product.

4.  Services

The service sector will be negatively impacted by the increase in the effective tax rate from the current 14 per cent. The tax base for services is also likely to increase significantly, as GST will be levied on a much larger base of goods and services. The services such as aviation, media and telecom will be negatively affected by GST.

5.  Logistics

The logistics cost of the companies will be reduced by almost 20 per cent to 30 per cent. The majority of the saving will come from Central Sales Tax (CST), consolidation of warehouse space, faster transit of goods. Overall impact on the sector’s profitability will improve in future term.

6.  Metals

Currently, base metal products attract about 19 to 21 per cent of effective tax rate. Under GST, it is not known whether metal products will attract a special rate that is lower than the standard GST rate. In case metal products get taxed at standard GST rate, impact will be neutral.

7.  Telecom

Telecom sector faces several issues as cascading effect of taxes, issues with classification of services which would hamper the growth of this sector. The direct impact of GST will be increment of service tax from 14 per cent to more than 18 per cent. There is still no clarification for mobile wallets service. Therefore, telecom sector will be negatively impacted.

Upcoming Challenges for GST

There are various upcoming challenges for clearance of GST and implementation which will drive success.

1.  Revenue Neutral Rate: The major factor for success of GST is Revenue Neutral Rate (RNR). The revenue of government will get impacted due to change in tax system. So, it has to ensure revenue to remain same after implementation of GST.

2.  Threshold Limit in GST: When broad based tax structure in GST, empowered committee central government must ensure that lowering of threshold limit should not be a taxing burden on small enterprises.

3.  Robust IT network: Government has already incorporated Goods and Service Tax Network (GSTN). GSTN has to develop GST portal which ensure technology support for registration, return filing, tax payments, IGST settlements etc. There should be robust IT backbone.  

4.  Extensive training on Tax Administration staff: Being new tax system, state and central government staff to be trained in terms of concept, legislation and procedure.

5.  Additional levy on GST: There will be additional levy on GST to compensate states for loss of revenue after implementation of GST. The government is planning to give about 1 per cent levy to manufacturing states such as Gujarat, Tamilnadu and others.

Conclusion

Though almost all the political parties have now reached a consensus over GST, some last moment political tricks by smaller parties like Samajwadi Party, CPIM and Left alliance may not make GST a reality that soon. Let us keep our fingers crossed and wait to see this Bill turning into a new law, investor-friendly and industry-friendly. Over a period of next few months once the Bill turns into a law, we will keep coming back to you on various sectors post GST impact. As of now, the markets may have a fresh lease of life, though movements may remain sectors-specific.