GST A Profound Evaluation

During the last three years (2014-2017), Prime Minister Modi have brought about several changes and started various initiatives like Make in India and Skill India. All the initiatives taken up by Modi’s government have pushed India towards the Dawn of a new era which is definitely more dignified and glorious. GST is one of Modi’s controversial initiatives that created a lot of buzz.

GST is considered as an indirect tax,which would make India one unified common market. It is a tax which is imposed on the sale, manufacturing and the usage of the goods and services. It is a single tax that is imposed on the supply of the goods and services, right from the manufacturer to the consumer.

Now let’s roll back and take a look when it all started. Since the NDA came into power, they took the torch where it was left off by the previous UPA government for GST, yes you read it correctly, UPA was also working on GST.

A major breakthrough happened when the central government managed all states and political parties to on-board the GST and set its speed so that they can cross the finish line, which the last government was unable to do. Although it has some drawbacks like GST has a split structure as compared to ‘one tax one country’ which could have been better, but such a mammoth task had never been implemented overnight in the history of India where we have never seen any political party which had a majority in both the houses.

However, it needs a lot of groundwork to carry out such a reformation. Besides, there is a way open for further tuning in the future, but trying to make a perfect task cannot be an excuse to stop the good work.

Almost all the political parties were in favor of implementing the GST, although a few opted out in the later stage just to gain political mileage and tried to spread uneasiness against GST in the country. We can relate to a simple example where everyone wants to board the bus (GST benefit) but do not want to pay the ticket price (Public anger).

As mentioned earlier government has subsumed various indirect taxes in a single tax system, i.e. GST and according to the 122nd amendment bill of the constitution, items have been roughly categorized in five major slabs – 0%, 5%, 12%, 18% and 28%.

The significance of the inclusion of petroleum in GST bill would be very lucrative both for the state and for the center as oil and gas sector is the largest revenue earner for the Central and state governments.

Almost one-third of all the indirect taxes come from petroleum products and to avoid the losses, the government is trying to include petroleum products under the ambit of GST. Another blow to the GDP by the exclusion of petroleum products would be the loss of credit on goods and services covered by GST received and used to produce non-GST products.

Secondly, if the central government decides to include “oil-linked products” under the GST, it would eliminate double taxation and it would create a cost advantage of about 15-20 percent of industries in the procurement of bulk fuel, petroleum products like lubricants. Hence, the decision to include Petroleum under GST ambit is highly advantageous for increasing revenue, improving the growth of the economy, eliminating double taxation and creating a cost advantage for industries linked to the oil production and consumption.

India’s retail sector accounts for 22% of the GDP and add 8% of jobs in the economy. The key change that has occurred in the retail sector is related to the services, the services have become eligible for set-off against taxes on goods. This change would bring about a positivity to the retailers, as the VAT structure has resulted in amenability issues and consistency of VAT laws has resulted in an additional cost burden on the retailers.

The Bio-Pharma under the pharmaceutical industry generates nearly 60% of total revenue. The impact of GST on pharmaceutical industry has been to resolve a multistage taxation system and to dampen the loss of tax credits on services such as logistics and patents inadequacies.

Small and Medium Enterprises have always represented the model of socioeconomic policies of the country as they contribute towards 40% of employment and 17% of the GDP. The customers of SME see the taxation as flow-through as the GST will be available to them as input credit and hence it will not affect the SMEs significantly.

Ordinarily, the purchase price would reduce, as tax content of most products would come down. However, if a product has evaded taxes completely, then it may find an increase. Further, those items, which are now taxable where the tax rate earlier was zero, may be more expensive as an exemption and zero-rated lists may come down in the GST regime.

The impact of the tax on the wholesaler or retailer would be limited to the value addition. The tax paid at earlier stages would be available as set off for payment of GST on supplies. Therefore, traders in GST regime can concentrate on growth into large entities instead of remaining small and fragmented.

There would be a saving in taxes absorbed at various stages of manufacturing, thereby reducing the cost of goods sold. This would make them more competitive both in domestic and international markets.

The exports would-be cheaper as taxes paid in earlier stages could be refunded. The indignity of harassments and bribe for honest manufacturers would substantially reduce over a period.

One of the key economic contributors to the GDP, i.e. Service Sector would also be severely impacted as the service tax rate has been doubled from 14% to 28% under the ambit of GST. Those working on low margins may become unviable. The net tax payment may be substantial as in most advisory services, manpower cost is maximized. Under GST, they would be taxed at the place of consumption.

From the businessperson and consumer perspective, this change is going to have a substantial impact on the business as well cost to consumers depending upon the structure of the business and location of business and consumer. Therefore, it becomes essential to restructure the business and location depending upon the assessment of implication of GST on each type of transactions. The impact analysis and planning for restructuring can be done only after the draft law is released.

From the business point of view, a short term challenge being observed is that – this transition to GST has disrupted the working capital availability because of  “input credit lock-up” causing an unjust burden on their finances. So, it gets difficult for businessmen to scale up their production levels.Therefore, it becomes essential to restructure the business depending upon the assessment of implications of GST on each type of transaction involved.

During the first encounter, GST definitely shows off some confusion, but eventually it has held grip and turned out to be a smart decision. GST is effective from 1 July 2017 but there were some miscalculations where a few goods and services were put in the wrong slab if we look from a common man’s point of view, but the government is determined to improving it by making alterations wherever the need arises.

As on Sunday 1st, October Finance Minister Arun Jaitley gave hints on reducing the slabs and reshuffling of goods and services against respective slabs in goods and service tax (GST). The current slab rate is 5%, 12%, 15%, 25%.

Hasmukh Adhia, Revenue secretary is working tirelessly on the implementation of goods and service tax and he has assured that GST would definitely provide long-term benefits to many. In the long run, GST will improve the GDP growth and benefit the nation by becoming economically stable. Although GST was implemented in a hurry, government is always on its heels keep reforming it. During an interview, Revenue Secretary indicated that it will take some time, but eventually the transition pain will be vanquished.

Last month Modi suggested for the inclusion of registered small traders under GST as it will make India more tax compliant society.

Many Indian industrialists opined that the digitized economy is the biggest gain of GST. They also hinted that there will be some hiccups at the initial stage, but the changes that the new tax regime will unleash will lead to a ‘forced morality and a willingness to pay taxes’.

GST has affected the nation, whether it’s a common man or an upper-class businessman, a farmer or a fisherman. Although the success of GST is still in doubt as there are some errors, nevertheless it seems to be a great strategy in the context of economic stability. GST can be easily seen as an outstanding reform in the economic sector during the 70 years of Independence , some people calling it a game changer. Also, the IMF and world bank has extended their support for GST and expecting to see a strong and well structured economy with better results for India in the coming days.

By Sudhir Aggarwal