The Goods and Services Tax (GST) council on 18th May 2017 fixed tax rates on 1211 items under 98 categories,most of which will likely become cheaper as the new rates will be lower than the current effective levies. GST council had categorised 1200 items under 5%, 12%, 18% and 28% tax slabs.About 60% of the items were categorized under 12% & 18% tax slabs.
This sector will be benefited the most from GST implementation. Tax rates of common use products such as hair oil, toothpaste and soaps have been set at 18%, which is below the current effective tax rates applicable in most of the states. Inputs required for food processing industry such as milk, meat, cereals etc. are exempted under GST. Aerated beverages have been placed at highest tax of 28% and 12% cess will be applicable, this will have a negative ripple effect in the particular segment of the industry.
The main raw materials for cement industry are limestone, coal and electricity. For quarrying limestone, cement companies have to pay royalty to particular states and electricity will be charged at the present rates irrespective of GST. Main benefit of GST implementation for cement companies will be coming from coal, under GST coal is placed under 5% tax slab which is less from current tax rate of 11.7%.
Overall basis, Cement will be taxed at highest slab of 28%. However, Cement companies are likely to pass this to consumers and benefits coming from raw material (coal) might nullify the effect.
Auto industry already attract different levies, which add up to 28% tax. GST implementation will make vehicles more expensive than from present rates, under GST vehicles will be taxed at highest slab of 28% and also will attract additional cess. Cars with engine capacity of 1200 cc or less will attract an additional cess of 1%, whereas cars with engine capacity of 1500 cc or less will attract an additional cess of 3%. Sports utility vehicles, luxury cars and larger sedans will be benefited from the new GST scheme. Even after the additional 15% cess, the total levied tax will be less than the currently imposed tax.
In the two-wheelers segment, motorcycles with engine capacity of 350 cc or more will be imposed additional cess of 3%.
Overall additional costs will be transferred to consumers, this might hamper the purchasing patterns of consumers who are planning to buy small or basic cars.
What is GST?
GST is Goods and Services Tax and it is a major Indirect Tax reform in India. The proposed GST is a comprehensive tax structure based on manufacture, sale and consumption of goods and services, with individual central and state components in the tax structure as CGST (Central Goods and Services Tax) and SGST (States Goods and Services Tax).
Cenvat and State VAT
Currently both the CENVAT (Central Value Added Tax) and the State VAT (Value Added Tax) frameworks are used in the system, but both have certain incompleteness. CENVAT is not yet been extended to include chain of value addition in the distributive trade below the stage of production. It has also subsumed several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges in the overall framework of CENVAT and and thus kept the benefits of comprehensive input tax and service tax set-off, out of the reach of manufacturers and dealers. In the present State level VAT scheme, CENVAT load on the goods has not been removed and the cascading effect of that part of tax burden has remained there. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which have still not been subsumed in the VAT. There has also not been any integration of VAT on goods with tax on services at the State level with removal of cascading effect of service tax. Burden of Central Sales Tax (CST) has also not been removed fully.
The introduction of GST will try to reduce burden of double taxation by removing these taxes. Proposed GST is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work.
Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholesaler. When the wholesaler sells the same goods after making value addition of (say) Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below.
Comprehensive GST framework will incentivise large number of producers to register themselves into the tax system so as not to affect their competitive edge.
GST’s impact on economy
GST can increase the efficiency of doing business in India by reducing cost (lower taxation and filing cost) and increasing profitability, which subsequently helps GDP and investment growth. It can boost exports as lower taxation and filing costs improve price competitiveness of Indian goods abroad. Strong GST framework can improve tax compliance and increase tax revenue. According to study by NCAER (National Council for Applied Economics and Research) complete implementation of GST could lift GDP growth by 0.9-1.7%.