GST Short-term Pain, Long-term Gain?
It took 11 years and a few months, but the changeover to the one-nation-one-tax regime has begun. This one gigantic tax reform seeks to knit together all the threads of economic activity into a well-woven, well-stitched fabric of economic expansion.
It’s a milestone moment for India. As envisaged, when one firm’s input is connected to another’s output, it will ultimately turn India into one giant networked econorama. Now after 12 years since it was mooted, the integration of India’s billions of firms into an organic inter-linked economy is complete.
But here comes the hard part.
Indian businesses face the fundamental challenge of integrating every transaction on the GST network. The practical implementation of the GST rollout has frayed the nerves of corporate India, small businesses, and micro, small and medium enterprises for the most part. All small and large businesses now have to put up their invoices on the GST network, and record input and output into the wider system. But the question is, is corporate India ready? Are small firms that were hitherto not on the formal tax network ready to bite the bullet of formalisation?
GST is transforming businesses in many ways. It’s forcing Indian businesses to record all their transactions. It is compelling companies across the value chain to comply with registration and filing information.
It’s a massive system migration, and Indian businesses have many hurdles to cross. The first contention is how to reconcile the credits that firms will receive on their purchases and pass them on to customers. If a firm’s supplier is not a high-grade vendor, corporates will not be able to claim input credit, which will mean higher working capital requirements.
The government has been unequivocal in its assertion that firms should pass on the benefit of input credit to customers, and has even sent out squads to investigate this to prevent any inflationary impact on the economy. But many Indian corporates are still trying to figure out how much input credit they will receive, which then can be adjusted against the sales invoices.
The other is the confusion in many sectors on how much GST consumers are to be charged. Social media is already rife with the news that restaurants are double-taxing the poor consumer — charging the erstwhile taxes over and above the GST. Second, different GST rates are applicable to different restaurants. Smaller eateries are supposed to charge the lower GST of 5 per cent, but are actually charging the higher slab of 18 per cent.
Such issues are not uncommon across the Indian business diaspora; with some businesses likely to be impacted positively, while others see an increase in taxes as a major hurdle that could impact revenues and sales in the short run. Says Biren Vyas, Director, Indirect Tax, Grant Thornton India: “There are three kinds of businesses, those that have implemented the GST, those that are trying to move now, and some still waiting to see what happens. It’s the latter segment that needs to be worried.”
Besides, the GST is not a uniform tax with its four slab rates, and multiple reconciliations. Within sectors too, for example, the slab rates of taxation are different for various kinds of products.
The Speed Breakers
In the auto sector, for example, the policymakers’ decision to include ambulance and rural vehicles (10-13 seaters) in the highest tax bracket (28 per cent plus 15 per cent cess) reflect that only size and design were considered while segmenting rates for vehicles.
As for hybrid vehicles, the industry is still expecting the government will reconsider the rates. The Society of Indian Automobile Manufactures (SIAM) has asked the GST committee to review rates on hybrid vehicles. Vishnu Mathur, Director General, Siam says, “The government is open to suggestion. We may see new rates for hybrid vehicles.”
However, Mahindra & Mahindra managing director Pawan Goenka thinks there will be no revision in the short run. “It certainly seems that the decision is final. If it happens (reduction of rate), it is fine, but I am not expecting it to happen in the short term,” he says. Goenka feels that with the GST move, hybrids will become less attractive and difficult to justify as they would not get any concession from the Centre. “Many players who had aggressive hybrid plans will have to rethink their plans,” he opines.
Another major concern for the industry is around the benefits it received from state governments for setting up new plants. Earlier, auto original equipment manufacturers (OEM) partnered with state governments for various incentives for setting up manufacturing plants in their states. As a reward, states extended benefits of central sales tax (CST) or value-added tax (VAT).
In few cases, states even promised benefits of up to the amount invested by OEMs. But now after GST implementation, VAT and CST would be subsumed and not levied separately, which may make it difficult for state governments to attract new investment.
OEMs in hilly area states that were earlier exempted from excise duties, will no longer enjoy such a benefit. Under GST, refund of 58 per cent has been committed through the Department of Industrial Policy & Promotion. This means it’s a loss of 42 per cent for the industry. Hero MotoCorp and Ashok Leyland are two companies that have invested in the mountains of Uttarakhand.
That apart, some states are increasing registration fees and road tax — not under the GST umbrella — to compensate for their loss of revenue. Maharashtra has increased road tax by 2 per cent after GST implementation to negate the loss of octroi, which means small car buyers in Maharashtra may technically get no GST benefit. Mahindra & Mahindra’s Goenka says it would negate the net benefit of GST to automobile consumers in the state.
Besides, the rates set for used car under GST is now same as for new car — much higher than before.
Says Nagendra Palle, CEO and MD, Mahindra First Choice Wheels, “With a base GST rate of 28 per cent and accompanied cess, we are now looking at tax rates of 28 per cent to 43 per cent on the gross margin generated, probably the highest in the world for used car transactions. This rate would make it four to five times the existing national average and twice the maximum existing VAT.”
In An Air Pocket
As expected, the country’s aviation sector is struggling with the teething issues arising from the implementation of GST on 1 July. The sector, which was hopeful of getting its request heard by the government to delay the compliance for a few more months, was upset over the sudden change as many airlines were not prepared to make their nation-wide ticketing systems GST ready.
The GST council has fixed 5 per cent tax for economy class, lowering it from the earlier 5.6 per cent, and raised tax on business class from 8.4 per cent to 12 per cent.
“We haven’t yet started looking at the financial impact of the regime change, though it is surely going to have some impact on the cost. The priority now is making the system ready for the new tax structure,” says a senior official associated with one of the country’s top full service airlines.
While currently the tickets are issued with GST rates, the system is not yet fully aligned with the transition process, adds the official who doesn’t want be identified, Leading tax consultants had earlier cautioned that while the new regime will be beneficial to the overall economy as it will prevent inflation through input tax credit (ITC) and others, whether such credit will be passed on to customers by the goods and service providers is yet to be seen.
“If you are a frequent flier, you will find the impact of GST on air fares and the new tax rates and ticket prices to your liking. The reduction in tax rate is positive for low-cost domestic carriers. However, it remains to be seen if the airlines will be willing to pass on the benefits of the reduced tax rate to customers,” told Archit Gupta, founder and CEO of tax advisory firm ClearTax.in, to a national daily earlier.
A Floor Test For Real Estate
The new GST poses a different problem for real estate. Developers are pointing out that while the government said one nation-one tax, most state governments are still levying stamp duty on property registrations.
Developers are also trying to quantify the amount of input credit they will receive which can be defrayed in costs to buyers. Besides, the new GST rules specify that input credit on land has to be considered at 33 per cent of cost. However, in cities where the land costs is much higher than 33 per cent of project costs, business could get impacted, which will increase the prices of real estate for the end consumer.
Says Gaurav Gupta, director of Omkar Developers: “While the GST is good in cities where land costs are high, the higher costs of GST will impact the real estate.”
Retailers Hit Below The Belt
The mega reform of GST should be a mixed bag for the FMCG sector. Clearly, the GST rate structure looks positive for some products such as soap, toothpaste and hair oil, while for tea and coffee, it is neutral.
“For most FMCG majors, the GST rate structure is likely to be neutral or marginally positive, as their broad portfolios would see a mixed impact,” says Anita Rastogi, Partner Indirect Tax and GST, PwC.
A recent development on inventory may help firms to tide over the problem of inventory management and unsold old stocks. According to a new clarification, retailers can claim input credit on unsold inventory to the extent of 40-60 per cent. The government has given a time frame of six months for clearing the old stock and availing this benefit.
“We are calculating the profits to pass on to consumers on what categories,” says B. Sumant, President, FMCG Business, ITC.
A Slow Ride
Some hotels and resort owners didn’t find it smooth and for them, the implementation comes with its fair share of confusions and ambiguities. Talking about the implementation, George Muthoot George, MD, Muthoot Leisure & Hospitality Services, says, “We had a tough time implementing the same because our software provider could not provide a complete solution as there were last minutes changes in the GST rules.”
The lack of clarity on tax structure and different views expressed by the authorities have confused the hoteliers.
“We had to do the billing manually for the first three days. Even now there is no clarity on the tax slab calculation, whether the slab is based on published tariff or applied tariff,” adds Muthoot.
IT Needs An Upgrade
For GST to kick-off smoothly across the country, the entire Indian economy needs one massive upgrade in IT systems, and clarity on claiming tax credits. The Confederation of All India Traders (CAIT) has suggested the government to exempt the accounting software from tax under GST or bring the same under the tax slab of 5 per cent. This is capped under 18 per cent tax rate.
According to CAIT, nearly 60 per cent of small businesses in the country, particularly in tier-2 and tier-3 cities, still have not computerised their existing business formats, whereas GST is entirely based on e-compliance — with four verticals, e-tax, e-return, e-audit and e-assessment. However currently, there is huge disparity between tax rates on different components of computers making them infeasible for small traders, according to CAIT.
CAIT National President B. C. Bhartia and secretary general Praveen Khandelwal say there is a huge difference of tax rates on computer hardware such as CPU, which is taxed at 18 per cent, while monitors are taxed at 28 per cent. This complicates and discourages small traders from adopting the GST regime in true spirit.
If India Inc. can pull of this transformation, a new chapter will have truly begun. It will combine the forces of entrepreneurship with the growth possibilities in a way no country has ever seen before. One way or another, firms that make the metamorphosis will gain and prosper, and those that remain on the sidelines will face annihilation and loss.
(With inputs from BW Bureau)
