GST Impact: A win-win situation

The service sector also benefits as credit for tax paid on inputs can now be claimed

The Rajya Sabha has passed the GST Bill, paving the way for the most significant tax reform and probably the second-most significant economic reform since Independence. With the Bill’s passage, the advent of the Goods and Services Tax (GST) is now only a matter of time. The April 2017 roll-out date appears to be more realistic than ever. However, the government will have to make a sprint from here to complete all legislative procedures to roll out GST as per the target timeline.

The Finance Ministry, pursuant to the consensus from the Empowered Committee of State Finance Ministers, had already released the draft of the Model GST Law (the ‘GST Law’) earlier in June.

It is common knowledge that this piece of legislation is intended to transform India into a single integrated market, demolishing the proverbial “invisible Berlin wall” that hampered inter-state trade in India. The GST is expected to simplify taxes, reduce procedural hurdles, increase tax base, reduce tax avoidance, and bring down costs, benefiting all the stakeholders.

Cumbersome tax structures

It is evident that with the onset of GST, there will be a remarkable impact on every sector of the economy. The manufacturing sector, which has hitherto been plagued by a complex tax structure, should stand to benefit, in particular. GST will subsume some major Central and State levies such as duties of excise, additional duties of customs (applied in lieu of excise and local taxes), service tax, value-added tax, Central sales tax, entry tax, octroi and luxury tax.

Presently, these taxes in aggregate typically constitute 25 per cent to 40 per cent of the price of products, with certain categories being taxed at lower rates. With the current deliberations around GST revenue neutral rate (‘RNR’) being 18-20 per cent, there could be a reduction of tax incidence for several product categories. The launch of ‘Make in India’ initiative two years back reaffirms that the Centre recognises the significance of the manufacturing sector and envisions India to become a manufacturing hub. Introduction of GST will provide further thrust to the Indian manufacturers with hassle-free supply of goods across the country and reduction in the tax cascading effect, which may ultimately lead to a lower cost of production.

A temporary backseat

The service sector is likely to face the heat on account of impending benefits to the manufacturing and trading sectors. While on the one side the service sector will see increase in overall tax incidence on the supply side, the compliance environment for the sector is also likely to dramatically change.

That said, it’s not that the service sector has no piece of good news. Better availability of input tax credits on procurements should mitigate the impact of the increased tax incidence on services due to surge in headline rate of tax. Also, some sectors that have historically faced competing tax claims from multiple tax departments are likely to heave a sigh of relief. The construction, software, intellectual property and leasing businesses are practically the front runners amongst the service sectors that should stand to get relief from the perennial ‘classification of goods versus services’ debate.

Preparing for future

Undoubtedly, in response to a tax reform of such momentous implications, wherein the government is demonstrating advanced level of preparedness, India Inc should simultaneously take proper steps to adapt itself to what we may call as tomorrow’s reality. Businesses should come up with a specific work plan to handle the gigantic changes expected in the indirect tax landscape.

Now with the GST Bill being passed by both Houses, this should provide a good starting point to all industries to evaluate possible implications of GST on their current business model. Through such analysis of the impact areas, the possibility of adhering to alternative business structure should be evaluated to achieve more tax efficiency and ease of compliance.

The writer is Leader, Indirect Tax, BMR & Associates LLP. Assisted by Poonam Harjani and Dhiraj Agarwal

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