GST - Impacts & Expectations of Industry

Contributed by: CA Tansukh Chheda & Student Keval Shah

Introduction:
Goods and Services Tax (GST) -Tax on consumption of goods and services on value added basis, has
been emerging as tax of the future.Its now clear that Indias GST will be a Dual GST, where
importantly there wont be any distinction between the goods and services for the purpose of
imposition of Tax. Both Central governments and State governments will levy respective GST on a
common base value. Hence apart from few exceptions, all the goods and services will be brought
into the GST base.
It will cover all types of persons carrying on business activities, i.e. manufacturer, job-worker, trader,
importer, exporter, all types of service providers, etc. If a company is having four branches in four
different states, all the four branches will be considered as Tax Payers under each jurisdiction of
State Government.It is expected to help build a transparent and corruption-free tax administration.
The GST has been longstanding demand of the industry. It will serve the purpose of Industry being a
robust and streamlined indirect taxation structure. The effective implementation of GST will have a
positive impact on industry and economy as a whole going forward. Its impacts have been laid down
as follows:
Overall Impacts of GST:

Business Decision making will be Tax Neutral:

GST will be a tax on consumption & hence all stages of production and distribution will be
mere pass-through. Therefore business decision making will be Tax neutral

Impact on the Stock Transfers :

Taxation of stock transfer is in effect only a prepayment of tax on output which will primarily
impact the working capital requirements. At present Stock Transfer from one State to
another take place free of Tax against Form F. However, under the GST, Stock transfers from
one State to other to ones branch or consignment agent might be treated as inter-State
sale. The quantum of impact will vary depending on stock turnaround time at warehouse,
credit cycle to customer, quantum of stock transfer, etc.

Moreover, it will also have an impact on the stock transfers to branches/consignment agents
within the state. At present, the treatment of these transactions have been subject to the
laws & rules of different states. However, GST would be attracted if a dealer transferring any

goods or services from one branch in a state to other branch in the same state do not have
same BIN (Business Identification Number). Hence, these transfers might also be subject to
tax, unless the BIN of transferor and transferee is same.

Revision in Prices of goods & services :

Price fixation is critical to the growth of any business. Once there is clarity about the
operational impact of GST and finality about the rate structure, then price fixation would
become easier. In order to gauge the component of tax built into the cost and price of a
product or services, businesses first need to decipher their current pricing system.This
exercise may require collection of data from within and outside the organization. Those
organizations which restructure their prices early may gain first player advantage in a
competitive market.
Moreover this is also likely to result in a reduction in the prices of the commodities in the
long run as manufacturers and distributors would pass on the benefits of lower costs of
carrying on their businesses to the consumers.

Uniform Structure, Design & Compliance System :

The proposed GST, dual in nature envisages a uniform structure, design and compliance
system at all levels of Government and across the states, Therefore, cost of doing the
business in India will significantly reduce as the Differences in the Tax Structure of different
States and the Central Government greatly increase the cost of doing the business, which
would not be the case now.

Changes in the Tax Rates :

Under the current tax regime, the cumulative rate of tax on goods (both at the Centre and
the state) is approximately between 20-22 percent. Whereas for services the present rate of
tax is only 12.36 percent. This brings the over-all rate to 25%-30%. But, post GST, it is likely
to be in range of 18%-20%; a net gain of almost 6%-10%.There could be strong consumer
resistance in case of services with strong demand elasticity. This could force some sectors to
absorb the hike themselves. Depending on how much is passed on or absorbed, it would
affect the performance of service sector companies.Therefore, most of the dealers would
experience the change in tax rates, either significantly or marginally. Therefore they would
be required to conduct detailed study of the changed scenario.

Impact of GST on Working Capital Requirement :

Apart from the tax cost, GST is also likely to have an impact on the cash flow requirements of
business. This would be especially prominent in case of transactions involving supply of

goods. The contingencies due to which working capital would be blocked may arise primarily
on account of GST on Imports and on Stock Transfers, etc. Even in the federal structure with
the unified GST through proper transaction planning, it may be possible to optimize the cash
flows. Hence it will be important for businesses then to estimate and plan their working
capital requirements.

Changed system of Input Tax Credit :

The distinguishing feature of GST is provision of full input tax credit across goods and
services, and collection of tax on value added at each stage so that full tax is borne by final
consumer. This ensures that tax is always a pass through and that itnever becomes part of
the cost. For these reasons, introduction of GST will have a positive impact on profitability.
The GST will facilitate seamless credit across the entire supply chain and across all States
under a common tax base. The current framework allows limited inter-levy credits between
the Excise Duty and the Service Tax. Moreover, presently no cross credits are available
across these taxes and the VAT paid (on inputs) or payable (on output). Hence introduction
of GST would rationalize the tax content in product price and would thereby benefit the
ultimate consumer. Apart from the impact on bottom line of businesses, seamless credit
would also be beneficial to Government revenues as it has a built in self policing feature and
will reduce tax evasion.
Moreover, it is to be noted that the taxation of the Capital Goods discourages savings and
the investments and thereby retards productivity. The Flawless GST envisages full and
immediate credit for GST on capital goods (Both Buildings and the Plant & Machinery),
thereby fully eliminating the incidence of any indirect tax on the Capital goods. This thereby
enhances the productivity of Capital and hence reduces the Capital-Output ratio.

Cash Flow Benefits :

GST will offer the cash flow benefits to the dealers and the distributors. They would be
collecting GST from their customers as they make sales, but would be required to remit it to
the government only at the end of the month or the quarter, when they file their returns.
This extra cash flow would allow them to achieve scale and invest in making their operations
more efficient.

No Overlapping of VAT & Service Tax :

Presently, there have been many cases where both VAT and Service Tax have been
applicable and tax component has been overlapped in certain instances. In the AC
Restaurants, Service tax (Central Govt Tax) is to be paid only on 40% of the food bill amount
(applicable rate 40% * 12.36% = 4.944%), VAT is also applicable to the food items prepared

inside the restaurants as they add some value to it. VAT charges vary from state to state,
hence it is charged on higher rate rather than on 60% of Food Bill Amt. Tax component
increases the final bill by 25-30% thereby. Moreover, transfer of Intangible goods also
suffers the VAT as well as Service tax so by redefining both the definitions, this issue could
be resolved in GST and thereby it will reduce the litigation on the same.

Re-designing of Business Procurement Models:

It will be inevitable for the industries to learn the re-designing of the business procurement
models in order to optimize the tax outgo.

Up gradation of Software:
With the introduction of GST, Dealers and service provider will have to upgrade the
Accounting & Tax software and update the operating system which will seek training and
development of people at each level. Now, with the usage of sophisticated software like
SAP, etc. by the large companies, it will raise a challenge to the software companies to
upgrade and customize the same.

Training:
Competent professionals will be required and for that, comprehensive training will have to
be given to the staff members at each level so as to handle the complex GST matters, which
will be a combination of various indirect taxes prevalent now. Training will have to be
rendered to all departments such as marketing, accounting, etc.
Impacts of GST on Specific Industries:

Agriculture :
The main issue in the application of GST to food is the impact it would have on those living at
or below subsistence levels. For those at the bottom of the income scale, it doubtless
accounts for an even higher proportion of total expenditures and incomes. Taxing food could
thus have a major impact on the poor. By the same token, a complete exemption for food
would significantly shrink the tax base.

Food includes a variety of items, including grains and cereals, meat, fish, and poultry, milk
and dairy products, fruits and vegetables, candy and confectionary, snacks, prepared meals
for home consumption, restaurant meals, and beverages.In India, while food is generally
exempt from the CENVAT, many of the food items, including food grains and cereals, attract
the state VAT at the rate of 4%. Exemption under the state VAT is restricted to unprocessed
food, e.g., fresh fruits and vegetables, meat and eggs, and coarse grains. Beverages are
generally taxable, with the exception of milk.

In the rural sector, the predominant distribution channel for unprocessed food would be
either a direct sale by the farmer to final consumers or through small distributors/retailers.
Even where food is within the scope of the GST, such sales would largely remain exempt
because of the small business registration threshold.

Given that food is currently exempt from the CENVAT, the GST under a single-rate,
comprehensive-base model would lead to at least a doubling of the tax burden on food
(from 4% state VAT to a combined GST rate of 8%).The alternative of exempting food
altogether (or zero rating) would not be any better as it would have an adverse impact on
Revenue Neutral Rate.

Thus, prices of the agricultural items and services are expected to rise after the
implementation of the GST, although the overall inflationary impact of the proposed indirect
regime will be negative.

Works Contractors :
Works contracts can give rise to three taxable activities as per the current law and different
aspects of the same activity can be taxed by different statutes. There is supply of goods
which is taxable in the form of Value Added Tax (VAT). Then due to the very nature of the
contract, there is supply of services, and the service element is taxable as service tax.
Further if in the process of completing the works contract a new commodity comes into the
existence, there is taxable event of manufacture, and Central Excise Duty may be levied on
the same.

At present, the State VAT laws have specific provisions for taxing the work contracts. To
avoid imposing tax component on the service element, these laws and associated rules
provide for either separation of labour and materials

or

percentage

deductions

in

transaction value in the form of abatement. The Central Statute of service tax has also
provided for similar treatment to avoid the taxation of sale of goods as part of a works
contract.

With the probable introduction of GST, tax would have a simple structure and lead to
various case laws and legislative history on works contract becoming irrelevant & GST would
be taxed on a uniform rate.

At present, the contractors are generally liable to either VAT or the Service Tax; and not
liable to CENVAT, either due to certain specific exemptions or since the goods fabricated by
them are not marketable commodities. So, contractors are liable only for a tax rate of
maximum of 12.5%. However, these exemption and interpretations might not play a role in
GST and contractors would be liable to a total tax of 16% to 20% leaving an additional tax of
4% to 8%.

Moreover as the CST Act would also phase out, the contractors engaged in subsequent sales
and high sea sales will have to change their execution and revenue models in the absence of
such exemptions.

Power Sector :
Under the Constitution, Entry 53 in the State List of Seventh Schedule empowers the States
to impose tax on sale and consumption of electricity, except when consumed by the
Government of India or the Railways. Electricity has been held to be a good, but it is
presently exempt from CENVAT and VAT. Only electricity duty is levied on its consumption
by the States. Exemption of electricity from the main indirect taxes results in a situation
where generation and distribution of the electricity are not allowed any credit for the taxes
applied to inputs used in these processes. Thus, the excise duty or the State VAT paid on the
equipment and stores get embedded in the cost of the end product. Moreover, the
noteworthy advantage available to the Power Companies is that they can purchase goods
for the generation and distribution of electricity from other States at a concessional rate of
tax (CST) of 2%.

Hence, if electricity is taxable under GST, full credit would be available for the taxes paid on
the inputs. It would significantly reduce the cost of power projects and consequently the
cost of generation and distribution of electricity. Thus, the lower costs will also benefit the
downstream industries.

But in case if electricity is not taxable under GST, then it would have an adverse impact as no
credit will be allowed for the inputs and due to abolition of CST Act, companies wont even
be able to purchase at concessional rates (2%).

Telecommunication
India is one of the biggest telecom markets in the world. It has the third-largest telecom
network in the world and the second-largest among the emerging economies. The revenue
of the sector is either subject to service tax or VAT. More significantly, there has been the
continuous and ongoing problem of double taxation of the telecom services themselves,
from both a VAT and a service tax standpoint. Specifically, the taxation of SIM cards, prepaid
cards etc. has been a problematic area for a very long time. Hence, with the integration of
VAT and service tax into the GST, this problem will be resolved to a great extent.

Thus, with GST coming into force, it will be essential to ensure the availability of seamless
input tax credits across goods and services for this sector so that the ultimate tax on the
consumption of such services is kept low.

Intangibles :
There have been conflicting judgements with different perspectives of taxation of
intangibles under the indirect tax laws, whether it should be regarded as Service and
charged to service tax or be regarded as deemed Sale - transfer of right to use the same
and charged to VAT. This controversy will also be resolved with the introduction of GST.

Land & Real Estate :

The real estate sector is a significant contributor to the gross domestic product and serves as
a foundation for virtually all industrial and commercial activity. Further, housing constitutes
a large chunk of the personal consumption expenditure, especially for middle and upperincome households.Real estate is currently subject to multiple taxes at both central and
state levels, such as service tax on construction services and state VAT on building material
used in a works contract. Commercial buildings and factory sales are also taxable in the
same way, as are rental charges for the leasing of industrial and commercial buildings. The
states also levy stamp duty and registration fee on purchase of property. Little or no credit is
allowed to the commercial and industrial sector for these taxes, leading to a significant
cascading impact. Moreover, in this form, the system incentivises transactions without
invoice to minimise/avoid the tax burden.
Under the Constitution, taxation of real estate or land is an exclusive domain of the states,
giving rise to numerous constitutional challenges about taxation of transactions related to
immovable property. For instance, significant amendments were introduced in the taxation
of commercial property rentals and pre-construction agreements to sell a new residential

dwelling, making these taxable services which would now attract service tax. Whether these
are contracts for construction services is open to uncertainty. Where VAT applies to such
contracts, disputes arise about the allocation of the sale price to land, goods and
services.Such definitional and interpretational controversies could be addressed by
integrating the real estate sector within the GST framework. Internationally, in the modern
VAT jurisdictions such as Australia, New Zealand, Canada and South Africa, land and real
property supplies are inseparable and indistinguishable from supplies of other goods and
services. A similar practice can be adopted in the Indian context. The inclusion of real estate
in GST would reduce the cascading effect of taxes and significantly improve reporting and
compliance.

International Trade :
Introduction of GST is likely to benefit the foreign trade. Destination based taxation is a
fundamental principal of sound GST. Importers would be taxed at the same rate as products
produced and consumed with the jurisdiction. Exporters of goods and services shall continue
to be zero rated and will be eligible to claim refund of input tax credit. Hence, both Import
substituting industries and Export oriented industries would become internationally more
competitive. These will give an impetus to export whereas imports will be expected to
register a downfall.
Under the proposed GST, imports shall be fully taxed in India, irrespective of whether the
imported goods and services are produced in India or not, thereby, providing a level playing
field to domestic producers particularly in the import-substitution industry. This will boost
the Make in India initiative of the government.

Exempt Units :
These exemptions can be classified into two segments. (1) Area Based Exemption, such as
North East, J & K, etc. These exemptions might continue till their current eligibility period. (2)
Product based exemption, such as, exemptions might be converted into cash refund. The
exempt units will have to ensure that their benefits are incorporated into the New
Enactment as considerable litigation is expected post GST era.

Petroleum, Liquor, Tobacco to be Outside the Ambit of GST:

There are indications that certain components of petroleum, liquor and tobacco shall be
kept outside the ambit of GST. These products are taxable at higher rates with levy of
multiple taxes. Moreover they provide a major share of revenue to the government. Hence
by excluding these products from GST, the manufacturers of such products/components
wont be able to claim full input tax credit which would result in the Cascading effect.

Service Provider:
GST is a destination-based tax. At present, the services are taxed at the place of rendering,
while in GST they would be taxed at the place of consumption. Hence in the case of interstate services, the tax would ultimately go to the consuming state. Thus, the procedure will
increase the compliance substantially.

Thus, GST, once introduced will create a common market across the length and breadth of
the country- something which has eluded us since long. Hence, the size of the market will
cease to be limited by the Tax considerations.

Expectations of the Industry from GST:

FDIs in different sectors :

GST is expected to favour more foreign investments in India and campaigns like Make in
India will drive global companies to set up manufacturing facilities in India. Once the GST is
implemented in India we will see more FDIs in the different sectors of the industry.

Raise Up Demand for Human Capital :

It has been expected from GST to give impetus to the manufacturing industry, re-starting
their expansion plan,getting into new projects and by doing so creating the demand for
Human Capitalat all the levels and more particularly the skilled blue collar jobs.

Divisibility of Powers in Federal Nature:

In the Dual GST, where GST will be geared up by the two tiers of government, the Central
government should be prepared to pass more powers of the taxation to the States, if GST
has to be successful.

Constitutional Amendments:
Under the scheme of our constitution, no tax can be levied without the authority of law.
Power to levy tax on goods and services are vested with both Central Government and State
Government under Article 246 and List-I and List-II of the VII Schedule of the Constitution of
India. Neither Central Government nor State Government can seize the powers of other
without amending several provisions of the Constitution.

Stability of GST Act & rates :

For the smooth and successful operation/working of the GST, Dr Kelkar also recommended
that any change in the GST Act or Rates should only be with the mutual agreement of
Central & State Government on the same. Such gearing up for GST by the two tiers of
Government will be the Industries expectation for proper functioning of the GST.

Inter-State Transfer of Excess Credit :

In India, accumulation of credit becomes an issue in the absence of an appropriate transfer

or refund mechanism. Substantial reduction in the number of refunds is expected from the
present proposal of GST. Unless the tax payers are allowed to transfer excess credit from
One State to another, they would be forced to claim refunds in some states and pay taxes in
others. This would lead to working capital blockage for the industry. Hence the Transfer of
excess credit to be allowed from one State to another

No Blockage of Working Capital :

Moreover GST being a single tax levied now in place of VAT,Service Tax, Central excise duty,
etc., it is expected that the refund or the credit as the case may be, will be obtained soon
which will decrease the blocking of the Working capital.

Single Authority to Deal with :

Since the interpretations, procedures, approach, etc. differ at both central and State level
officials, so it is to be noted that assesse deals with single authority and not with two
authorities which will even worsen the condition. With the known fact that number of
officials at the Centre is less as compared to the State Level officials, it is expected that the
Central officials be assigned special task to monitor the operations of large dealers (who
have pan India operations) under CGST and SGST. Compliances under GST will be its
Registration,

Payment,

Return

Filing,

Refunds,

Documentation

&Record-Keeping,

Assessments & Scrutiny, appeals. Hence, day basis operations related to Registration,
payment of tax and submission of returns for all the dealers should be assigned to the
State.The assesses with the specific turnover and limited to one State only should be
assessed by State Department for both CGST and SGST.As per the present proposal and
recommendations, CGST will be assessed by Central Government and the SGST will be
assessed by State Government. It means assesse will have to deal with two authorities which
may be unacceptable by all the dealers. Hence, in general, idea is that assesses should
interact with single authority only.

Creation of IT Infrastructure :
In the modern tax jurisdictions, the goal of the taxman should not be to maximize revenue
but to maximize voluntary compliance and minimize the compliance gaps and tax disputes.
The growing volume of tax disputes has given India a bad name in jurisdictions across the
world which has even lead to downfall in investments and economic growth. Creation of IT
Infrastructure & GST Public Services Offices will be a prominent challenge for government in
implementation of GST. Even today, it is observed that computers and internet facilities are
not easily available in the villages and towns. Lack of knowledge of Computer in such areas is

hard reality and there is need to bring awareness regarding the same amongst dealers
across India.
Hence, a fully computerized tax administration & compliance system under the proposed
GST shall ensure the voluntary compliance & healthy business environment. This will boost
up the Digital India initiative of the government.

No Cascading Effect No SGST on CGST or vice-a-versa :

As per the Indirect Tax impositions as on today, Sales Tax/VAT is charged on the Excise duty
element also. As per New system, excise duty, i.e., CGST will be levied on each value
additions in transactions in the supply chain upto consumers. Hence, SGST will be levied on
such element (CGST) on account of each value added transaction.

For Example : If CGST is

10% & SGST is 10%, then with each value added transaction, there will be additional burden
of 1% of SGST (10% SGST on 10% CGST) which would result in heavy tax burden on the
consumers. Hence it is recommended that both CGST & SGST should be levied only at the
common base.

Growth of any business is good news for the economy and especially the taxman. Ecommerce sector, with its every increasing number of transactions in goods & services, is a
fertile land for sowing the seed of indirect taxes. Hence it has been expected from GST to
increase the Tax Revenues through growing businesses & to support the businesses with the
clarity on the taxation matters and ease of doing business.

Proper Mechanism needs to be introduced so that dealer get input credits for any GST levied
on the inter-state transactions. This would avoid cascading effect.

Moreover, other industrials expectations would be of Uniformity of rates of taxes,

definitions and provisions, granting of registrations, preparation of bills, filling of returns,
scrutiny of returns, assessments, audit, cross verification, appeal, etc. across the states; Inter
changeable credit of Central GST and SGST.
Thus, the overall macroeconomic effect of reduction in economic

distortions due to GST

would provide an impetus to the economic growth & lead to the efficient allocation of
factors of production, which ultimately would translate into enhanced economic welfare. As
per 13th Finance Commission Report; implementation of GST is expected to provide gains to
Indias GDP somewhere within a range of 0.9 to 1.7 percent.
Readiness for Change :
The introduction of GST is thus likely to improve the tax collections and boost Indias
economic development by breaking the tax barriers between the states and integrating India
through a uniform tax rate. Whether the stakeholders will gain or loss depends upon the tax

schedules, final GST rates and the laws that are framed for availing input tax credit on itemto-item basis or on cross basis. Hence, Financial gains will be all pervasive if stake holders
rightly understand the intricacies of the law and take timely steps to upgrade their software
and systems. Moreover GST has the potential to transform not only the tax system in the
country but also the way we organize and do the business and thereby it will provide a new
impetus to Indian industry and inclusive growth.
Thus, let us all hope that the most awaited & biggest economic reform in the history of
Independent India brings acche din for wide range of stakeholders including the industry,
the Government and the consumer and drives the Indian economy in the positive direction.