If the November 08 2016 demonetisation left a nation in total chaos for the first week, then the historic Goods and Services Tax (GST) roll out on July 01 has taken many by surprise, shocked, stunned at inflated bills. But the NDA government's intentions were fair and clear. It sought to usher in " One Country , One Tax "with a view to unifying markets and aligning to global standards to make India more competitive i international markets.
But the objective has been lost out on the citizens just as demonetisation aim was to ferret out black money, tax evaders and hidden wealth. GST is essentially the 2nd surgical strike on black money as every trader has to be registered and get the GSTIN (registration number) and submit a monthly or a quarterly tax collection statement. Accounting by every trader becomes now legit and mandatory.
There have been vast instances of small and medium level traders particularly in the fire cracket industry particularly in Tamil Nadu, selling only half of the stuff officially and smuggling out the rest and selling their through usurious vendors and making a huge profit but paying no taxes. Observers say their protests are not justified at all.
What Modi has sought is:
1) through demonetisation he has unearthed hoarded money, black money, terror funding at one stroke though small businesses suffered some amount of collateral damage which affected GDP growth in the last quarter of FY 2016-17. But Q1 growth is likely to pick up.
2) GST aims to subsume a plethora of some 15 to 20 taxes into one single tax across the country , unify markets pan India, and make goods uniformly prices across the country, albeit some goods become costly and some become cheaper. That's were the citizens have been taken by surprise because none has read the fine print of GST implementation.
3) GST is a simple tax but its implementation has been complex as it has layers and layers of taxation levels for various commodities. Luxury goods have become costlier , items of mass consumption become cheaper. A Robin Hood tax of Modi is nothing new, most countries of the world are already implementing it to make their goods internationally competitive . Except that at the highest layer GST tax of 28% on luxury goods is the highest in the world. Even UK and USA don't have GST higher than 17%.
4) The concept of GST is quite different . It's not taxation at source. Its destination tax. Or Rather it's a consumption tax. A product is manufactured in Tamil Nadu and travels through the country and say reaches Delhi, where the buyer or consumer pays the tax for it. Both the centre and state have their share in this tax. If tax levied at a restaurant is 18% the 9% goes to centre and 9% goes to state.
This is what that has taken people by surprise. Wining and Dining has become costlier, Travelling especially by air has become costlier at a time on is expecting a stake out in air space with the strongest and deeply lined pocket said to survive. The GST has been imposed on some 1200 items with tax of 18% being the most on most of the times in the tax basket.
Items that have become cheaper are : Eatables: 1. Milk powder 2. Curd 3. Butter milk 4. Unbranded natural honey 5. Dairy spreads 6. Cheese 7. Spices8. Tea 9. Wheat 10. Rice 11. Flour 12. Spices 13. Groundnut oil 14. Palm oil 15. Sunflower oil 16. Coconut oil 17. Mustard oil 18. Sugar 19. Jaggery 20. Sugar confectionery 21. Pasta 22. Spaghetti 23. Macaroni 24. Noodles 25. Fruit and vegetables 26. Pickle 27. Murabba 28. Chutney
29. Sweetmeats . .
Items of daily use: 1. Bathing soap 2. Hair oil 3. Detergent powder 4. Soap 5. Tissue papers 6. Napkins7. Matchsticks 8. Candles 9. Coal 10. Kerosene 11. LPG domestic 12. Spoons 13. Forks 14. Ladles Skimmers 16. Cake servers 17. Fish knives 8. Tongs 19. Agarbatti 20. Toothpaste.
Stationery :1. Notebooks 2. Pens 3. All types of paper 4. Graph paper 5. School bag 6. Exercise books 7 Picture, drawing and colouring books, 8. Parchment paper 9. Carbon paper 10. Printers.
Healthcare : 1. Insulin, 2. X-ray films for medical use 3. Diagnostic kits 4. Glasses for corrective spectacles 5. Medicines for diabetes, cancer.
Apparels: 1. Silk, 2. Woollen fabrics, 3. Khadi yarn 4. Gandhi topi 5. Footwear below Rs 500
6. Apparel up to Rs 1,000.
It is expected that the lower GST rates may lead to a decline in inflation, economic growth may not improve significantly in the short term even though it will benefit both India Inc. and the government in the medium term, financial experts say. Most economists forecast inflation to come down as GST rates for most goods have been fixed at a lower rate.
India Incorporated has a major task on hand as most manufacturing units and industries would now have to reorganise their businesses as the country switches to the GST regime, which brings in more small companies into the tax net because of registration through the GSTINN. .
"It's not optimal, but let the best not be the enemy of the good. Even with its imperfections, it could usher in significant benefits, especially through a quantum leap in transaction trails and logistical efficiencies," DK Joshi, chief economist of Crisil, is quoted by the media as saying in an internal report.
What is intriguing is that , though inflation is set to come down , economists believe that this may not influence the Reserve Bank of India to cut policy interest rates at the next policy review. RBI will assess the monsoon situation as well as the way the new tax regime pans out, Sunil Sinha, chief economist of India Ratings is quoted by the media as saying.
Economists and Industry observers claim that the GST will have five major impacts in the short term:
Shake UP Corporate Entities and their operations : How ? The new tax regime will force many companies to restructure their operations. Companies will now insist vendors and suppliers to furnish invoices as GST will make it impossible for firms to evade taxes. Big companies stand to benefit as they have a supply chain in order and can offset taxes paid on inputs. Smaller firms may end up spending more as compliance cost will rise. "While the impact on companies varies following existence of production units in the excise exempted zones, implementation of GST should result in cost savings in the supply chain network and expedite a shift from unorganized to organized trade," a foreign brokerage firm Jefferies is quoted as saying in the media. .
How to pass Benefits of Lower Tax to the Public? While the GST Council, headed by Finance Minister Arun Jaitley, is expected to keep a close watch on whether companies are passing on the benefit of lower taxes to consumers, experts are however divided on their opinion on the implementation of the policy of anti-profiteering.
"We believe that while corporates would pass on the direct benefits of GST (like a lower tax rate), they would aim to retain partly (if not fully) the indirect benefits from the saving in logistics costs, streamlining of business processes and the seamless flow of input credits," Financial Services company Nomura is quoted as saying.
Though GST laws focus on anti-profiteering measures—the benefits of the reduction in the tax rate and input credit shall be passed on by a commensurate reduction in prices—such measures are difficult to implement and would be a retrograde step, similar to price controls, if implemented in haste, Nomura claimed.
Companies may use the savings from tax outgo under the GST regime to improve profit margin to some extent and invest the rest in building new capacities, it is claimed.
Most taxation experts feel the real impact of the government's big-bang reform can be assessed only after a full year of its implementation. But its immediate impact is that in many cases it weighs heavily on your pockets while in others it may soothe the traders' frayed nerves with input tax credit. In terms of GST effect on the government's revenue kitty, it seems to be on the wait and watch mode.
Services, including banking and telecom, gets more expensive, as also purchase of flats, ready-made garments, monthly mobile bills and tuition fees. In the GST regime buying a flat or shop, will attract 12 % tax as compared to current six per cent approximately. "Though the developers are expected to pass on the benefits of input-credit available to them, with the government also issuing an advisory in this regard, practically how it will work is doubtful," GST expert Pritam Mahure is quoted by IANS as saying.
Foreign investors have welcomed the GST as it make it easier for them to manufacture and move their commodities in a freer manner as most of the 23 states have dismantled their check posts and gates. It's interesting to hear Commodities trading guru and hedge fund manager Jim Rogers, who had sold his holdings in Indian companies and exited late 2015 on the grounds that the NDA government led by PM Modi had then failed to live up to investors' expectations, say that he is considering re-entering India.
With Indian markets sustaining a record-breaking rally, Rogers admitted that he may have missed the bus on India, "On GST, I am amazed, shocked and stunned," he said in an interaction, referring to the goods and services tax that will create a unified market in India.
"If Modi continues doing stuff like GST, then not just me—everybody has to pay a lot more attention to India. This does not mean that I won't have another chance to enter—India is currently on my list of something to do," he is quoted by a leading news agency.
In conclusion , GST is a 2nd major surgical strike on tax evaders, brings most traders into the tax net, makes movement of commodities freer in the country, attracts foreign investors with a unified market with a single tax, though it has inconvenienced citizens on a spending spree with inflated bills, on wining and dining, travelling, property purchase etc. but GST 0n 81% of the commodities is expected to make them cheaper. A long term benefit with short term suffering as the country shifts to a new taxation regime. Its but natural.
By T N Ashok, Editorial Advisor