Tuesday 19th June 2018

    Decoding GST


    The culmination of a 14-year-long journey that began in December, 2002 ended on 1st July, 2017 with the launch of the GST. Touting it as a game changer the Prime Minister said GST will put India on path of a system that will be transparent, simple and will end India’s multiplicity of taxes and the confusion thereof. It is believed that GST will unify the country’s USD 2 trillion economy and 1.3 billion people into a common market! More here.

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    GST will change the way people conduct businesses in India as the country will become a single market with a single tax rate, irrespective of the state you conduct your business in. It will give the country one uniform tax that is comprehensive, applicable to both intra-state and inter-state transactions and levied on supply of goods and services. Barring a few exemptions, from the smallest entity on the economic food chain to multi-billion conglomerates, no one will stay untouched by the GST. It will bring about transparency and as there is less scope for tax evasion, there will be higher revenues. While the overall impact will be positive; there will be some inflationary pressure in the beginning phases of GST.

    The government has fixed GST rates on 1,211 goods and 500 services in the range of five to 28 per cent. Certain items such as alcohol, petrol, diesel and natural gas will be exempt under the GST. In addition to these, the GST Council has also classified certain items under the 0 per cent tax rate, implying that GST will not be levied on them.


    • CONSUMER DURABLES sector will be the biggest beneficiary of GST. Currently, FMCG products have a general excise duty rate of 12.5 percent and a VAT at around the same level. But after GST the rate is expected to be lower than this, which means FMCG products will become cheaper and it implies a positive impact on this sector. GST rate for products like hair oil, soaps and toothpaste has been lowered by 500-600 bps from the previous rates. At the same time, FMCG companies will also save on logistics costs, potentially 30% from current levels of 7% - 8% of sales. The sector has the most number of warehouses and hence offers maximum scope for consolidation.
    • PHARMACEUTICAL products will see 12 per cent GST as against earlier rate of 10 per cent and companies will most likely pass on this full impact to the patients, leading to some price inflation. Pharma companies were also disappointed as GST did not address the issue of inverted duty structure. While the healthcare sector will remain exempt from the GST, the inputs by the healthcare sector will be taxed at 18 per cent leading to rise in the operating costs.
    • WHITE GOODs players were previously taxed at 27 per cent against 28 per cent under the new GST regime. There are expectations that with GST coming in picture, there will be some increase in the prices of most consumer durable items in this segment. However, market analysts do not see any significant impact on the margins of the consumer durable companies post GST implementation.
    • TEXTILE INDUSTRY will see a negative impact as the incidence of GST on the textile industry will be more than current taxation. The CGST and SGST rates are likely to be higher than the current textile sector rate, resulting in higher revenue to the Central and State Government and textile prices will increase. However on the bright side compliance cost will be improved and reduced, fiscal barriers will be removed with the movement of textile Input and output taxes from one state to another and under GST, all Fiber will be treated in same way.
    • CEMENT is expected to be neutral to the GST implementation. Earlier, cement was taxed at 12.5 per cent excise and VAT rates between 12.5-15.5 per cent. Under GST, the cement will be taxed at 28 per cent, which is nearly the same as the current tax structure. Reduction in the prices of coal and GST will benefit cement companies further.
    • REAL ESTATE will see a boost as the GST rate to be confirmed for real estate construction projects is 12%. This is a game changer as it is proposed to subsume 16 indirect taxes levied initially on real estate. Housing will become more affordable. Overall there will be more transparency, reduced cost of construction and increased property purchases. The effective GST rate on under-construction real estate projects will be 12 per cent only and not 18 per cent as there will be abatement for land cost.
    • AIRLINES have got a mixed bag with GST. Travelling in business class will become expensive as after the rollout of GST, tax rate will increase from 9 per cent to 12 per cent. However, GST on economy class is set at 5 per cent, lower than the previous 6 per cent. Aviation Turbine Fuel (ATF) has kept outside the GST and the indirect tax structure will continue. As a result, aviation companies will now face two set of taxes - GST and indirect tax.
    • AUTOMOBILE & AUTO ANCILLARIES will have its share of highs and lows. The GST rates are likely to be between 18%-28% as against the earlier 26.50%-44%, making cars cheaper, except for the luxury/hybrid cars. However, there is no clarity on the sale of used cars. However, all the free services/warranties offered by the car manufacturers that were not taxed till date, will now be eligible for taxation. Tractors category will be taxed at 12 per cent against current 6-7 per cent which will be negative for the tractor companies.

      For all the importers/dealers under GST they would be able to claim the GST paid on goods imported/sold whereas currently, they are ineligible to claim the excise duty and VAT paid. Moreover, auto parts will become cheaper due to efficient supply chain mechanism under GST and the manufacturers will be at an advantage. Also, as input tax credit will not be available for the dealers for the stocks existing before 1st July, companies are offering discounts on their vehicles.
    • SERVICES SECTOR with 18-20% GST as compared to the current 15% service tax including cesses can dip revenues in the IT, telecom, banking, insurance sector, etc.

    The GST is projected to boost economic growth by as much as 2 per cent, which in turn will reduce the budget deficit and help the government to allocate more funds for development projects, leading to a better India for ALL.