All about Goods & Services Tax (GST) & its Implications

Implications of Goods & Services Tax (GST):

GSTThe Goods & Services Tax (GST) legislation; which intends to levy a single indirect tax rate of 18% by April 2017, has been passed by the Rajya Sabha and is pending in Lok Sabha for approval and ratification by at least 15 states before finally receiving the assent of the President. The objectives of GST are to ensure availability of input tax credit across the value chain, simplify tax administration and compliance, eliminate categorization disputes, prevent unhealthy competition among states and minimise the cascading effect of taxes. It aspires to employ an indirect tax regime which replicates the international indirect tax standards that are operational in the developed nations. The standard tax rate of 18% has been perceived to be at a level that is neither too high to fuel high inflationary pressures in the economy nor too little to adversely impact the revenue collection of the Centre and the State government. Some of the segments that have been kept outside the purview of GST are petroleum products, alcohol, stamp duty, customs duty and tax on consumption & sale of electricity. It is an attempt by the government to boost its revenue base to fund the social welfare and infrastructure projects which will ultimately fuel the country’s growth.

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GST would subsume the back taxes that are already in operation as shown in the figure:

GST & its implications

Impact on the Economy

The benefits of GST will begin in another three to four years. Until that, the centre will have to face the fiscal burden to compensate the state governments for any discrepancies in the tax collection. In the short-run, the economy may witness slightly high inflation which will be ironed out in the long run. SME supply essential raw materials to these large-scale industries to keep their wheels in motion and provide employment to a huge chunk of the population. Profit margins of these industries from a long time had been dented owing to bureaucracy and asymmetric tax structure. GST will cut down the red tape and layered tax structure to benefit the SMEs in the country. Moreover, the dual control of the Center and the State has been abolished for those SMEs which have an annual turnover of less than Rs 1.5 crore.

Impact on the Consumer

In India, inefficient supply chain management has long been blamed for the irregular supply, leakages, wastages and inflation in the economy. As a consumer, you always expect that any legislative move is going to ensure regular supply and price reduction of essential commodities. The GST aims at bringing about a revolution by way of efficient logistic management, warehouse rationalisation, higher volume of transactions & free flow of goods from one state to another. Efforts have been made to ensure quicker clearances at the check posts which would increase the fleet productivity to reduce transportation cost of the manufacturer. It ultimately translates as greater accessibility of essential and durables at the store near you.

On the inflation front, economists predict that if the standard rate of 18-20% is levied then, it will not add much to the already existing inflationary pressure. Of course, the CPI may increase by mere 0.2-0.3% to reach 5.2-5.3%. You need not worry because the government is planning to tax the essentials at a lower rate but be prepared to shell out more money on aerated beverages, tobacco products and all such commodities which would fall in the demerit list. The overall scenario is such that tangible goods are going to be cheaper whereas services would be dearer. If I take the case of the telecom sector, then the prices of handset mobile phones are going to tank but you would end up paying more on call rates and data charges. Similarly, airline ticket prices would surge, but you would be able to enjoy your favourite movies at cheaper movie tickets as the GST would lower the tax incidence for the multiplexes. On the financial front, banking & financial services are going to become expensive, and you would be required to pay more on fee-based transactions like loan processing, debit/credit cards, etc. Securing a risk cover is going to cost you more like life, health and motor insurance are going to be dearer. GST will make it easier for you to buy small segment car as the on-road prices of these vehicles are going to fall. Moreover, it is going to reduce the input cost of steel, cement and other raw materials used in construction industry. So, when the developers pass this benefit to property buyers, you may expect a fall in the purchase price of your dream home.

Also read: Income Tax Deductions 2016-17 for tax planning

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Impact on Industry sectors

GST & its implications

The standard GST rate has been recommended to fall somewhere in the range of 18-20%. If it is compared with the existing tax structure, then the investors may find that after implementation of GST, some companies would end up paying lower tax while others will stand to lose by shouldering a higher tax liability. GST is going to give a boost to the growth of the organized sector and listed companies. It will create a level playing field for the organised sector as well as the unorganised sector by bringing everyone under the tax net. The organised sector will not lose any more to the price wars as the GST will narrow down the pricing gap that kept profit margins of the unorganisedplayers high. As an investor, you may look forward to parking your funds in sectoral stocks like FMCG, small-segment automobile, multiplexes, IT, etc. which are expected to grow after implementation of GST. The infrastructure segment is going to witness growth, and you may look forward to investing in cement, steel and real estate companies. The logistic companies were reeling under the pressure of high cost on account of low fleet productivity, interrupted interstate goods movement, and high transit time. GST is going to give a fillip to the productivity of the listed companies by bringing down the transportation cost, and you may look forward to them as an investment avenue. Other stocks that could be favourable for investment are paints & adhesives, home décor and batteries.

Latest announcements on GST rates

On November 03, 2016, Finance Minister Mr. Arun Jaitley had announced the GST rates which has been divided into four tax brackets i.e. 5%, 12%, 18% and 28%. Listed below are some of the important details on this tax structure:

• To keep inflation on track, 50% of the items including food grains, in the Consumer Price Index basket would be taxed at zero percent i.e. there will not be any tax on such items.
• Items of mass consumption would fall under 5% tax bracket.
• There will two standard tax brackets i.e. 12% and 18% under which bulk of the goods would be taxed.
• The highest rate of 28% would be applicable to the luxury goods. Luxury cars, aerated drinks and tobacco products will also have an additional cess over and above the highest tax rate of 28%.
• White goods like refrigerator, washing machine, etc. which are currently taxed at around 30% would be taxed at the upper most tax bracket of 28%. Some of the white goods which are these days used by many of the lower and middle income groups may likely be moved to 18% tax bracket.

Also read: All you need to know about FATCA & CRS Compliance

2 thoughts on “All about Goods & Services Tax (GST) & its Implications”

  1. You put great information about GST, tax, complete business, money, accounting and financial reporting.
    Managing business accounting and financial management must be necessary after GST implementation in India.

    Business people will connect us regarding cloud-based bookkeeping software and GST ready business accounting software for small and medium enterprises.

    Thank for sharing.

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    AlignBooks
    http://www.alignbooks.com

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