At the stroke of midnight on June 30, the Goods and Services Tax (GST) has became a reality. Businesses expect a well-designed GST to simplify and rationalize the current indirect tax regime, eliminate tax cascading and put the Indian economy on a high-growth trajectory. The contours of the law may still be perceived to be complicated and sub- optimal and not the best solution possible, but best is not the enemy of the good. Even with its imperfections, GST, if well monitored, could usher in significant benefits, would usher in significant changes in the way businesses have so far been conducted in India, but some concerns remain.
Shift to the organised sector operations
The new tax regime requires many businesses to restructure their operations. To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in the tax chain. Also this would further require producers to buy materials from registered dealers and shall mean bringing more and more vendors under the taxation net. Vendors and suppliers shall be required 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. The impact on different companies may vary, implementation of GST should result in cost savings in the supply chain network and expedite a shift from unorganized to organized trade.
Passing on the benefit of lower tax
Though the avowed purpose of the Act is to ensure that the benefits of the lower taxes are passed on to consumers, there remains a doubt on the implementation of anti-profiteering norm.
While corporates should pass on the direct benefits of GST (like a lower tax rate), they should also aim to pass on the indirect benefits from the saving in logistics costs, streamlining of business processes and the seamless flow of input credits and may use the savings from tax outgo under the GST regime to improve profit margin to some extent
While GST laws include 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— though such measures are difficult to implement .
The current four-rate tax structure may spark a flood of litigation on everything from which tax brackets companies fall into to the revenue they generated”. This will likely add to existing litigation load in the appellate authorities level as well as with the Courts.
Sector-wise Impact Analysis
In a vastly geographically spread out country like India, the logistics sector forms the backbone of the economy. With implementation of GST, a well organized and mature logistics industry has the potential to leapfrog the “Make In India” initiative of the Government of India to its desired position.
The e-commerce sector in India has been growing by leaps and bounds. In many ways, GST will help the sector’s continued growth but the long-term effects need to be analysed since the model GST law specifically proposes a tax collection at source (TCS) mechanism. The current rate of TCS is at 1% and it’ll remain to be seen if it dilutes the rapid boom in this sector in any way in the future.
On the whole, the GST is expected to benefit the pharma and healthcare industries. It will create a level playing field for generic drug makers, boost medical tourism and simplify the tax structure. The pharma sector is hoping for a tax respite as it will make affordable healthcare easier to access by all.
With increased limits for registration, a DIY compliance model, tax credit on purchases, and a free flow of goods and services, the GST regime augurs well for the Indian start-up scene. Currently, many Indian states have very different VAT laws which can be confusing for companies that have a pan-India presence, specially the e-commerce sector. All of this is expected to change under GST with the only sore point being the reduction in the excise limit.
Among the services provided by banks and NBFCs, financial services such as fund based, fee-based and insurance services will see major shifts from the current scenario. Owing to the nature and volume of operations provided by banks and NBFC vis-a-vis lease transactions, hire purchase, related to actionable claims, fund and non-fund based services etc. The GST compliance will be quite difficult to implement in these sectors.
The dual monitoring structure of the GST by both the centre and the states should make tax evasion more prone to detection. The successful implementation of the GST would give a strong signal to the foreign investors about India’s increased creditworthiness, lesser compliance and procedural costs in the taxation sphere and remove the complexities faced by the foreign investors who were reluctant to invest earlier due to absence of single economic zone throughout the country.