All you need to know about GST

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 GST – All you need to know

The Goods and Services Tax (GST) has increasingly being talked about and debated over the last one week. Below, we try to break down and categorise the information flow into an easy-to-understand format.

 What just happened this week?

The Rajya Sabha just passed the constitutional amendment bill for the GST. This paves the way for eventually rolling out a GST. Under the Indian constitution, the centre does not have the right to tax goods beyond the point of manufacturing and states are not allowed to tax services. Yesterday’s bill is an amendment to the Indian constitution that confers the parliament and the state legislatures with the power to make laws pertaining to the GST. It gives them the power to subsume the number of taxes present today and guarantees compensation for revenue losses the states would incur for the first five years of implementing the GST.

 What is the GST?

The GST is a tax that attempts to simplify India’s complex indirect tax regime. It attempts to do this by subsuming the number of central and state taxes into a unified tax. In short, this is a single indirect tax that would help in unifying India into a single common market.

 What taxes will be subsumed?

The following taxes would be subsumed into their respective Central GST (CGST) and State GST (SGST). In addition, for inter-state transaction, the centre would collect Integrated GST (IGST), which would roughly equal the sum of CGST and SGST.

Centre level taxes to be subsumed:

 How will GST benefit specific sectors?

GST implementation would lead to three types of benefits flowing to the corporates.

  1. Shift from unorganized to organised market: In sectors where the unorganized market is higher, the organised players in those sectors will benefit post GST
  2. Efficient logistics planning: GST would lead to lower freight costs and optimal supply chain planning. This would benefit companies who have high freight costs. Organised logistics companies would stand to benefit
The following are sectors which would benefit from GST along the 3 points highlighted above

  1. Today many products attract higher tax if we aggregate the State VAT, Central Excise and CST. Further, there is a cascading effect of State VAT getting calculated including Excise duty. Tax credits cannot be utilised across various taxes so it adds up to higher tax incidence as well. For example CST and VAT credits cannot be fully set off against excise duty and vice versa, this leads to tax on tax. Cascading effect leads to 200-300bps of higher tax.

    Due to above factors, sectors like Auto see total tax incidence of 28-30%, this adds to cost of the supply chain. So a lower GST of ~18% would save cost; which if retained will add to margins or if passed down to consumers will lead to more incremental demand growth.

  2. There are many unorganised players that exist today due to tax arbitrage opportunities in various sectors. Due to this, the organised players become cost uncompetitive. Post GST due to availability of set off credit across the value chain, organised players will become competitive and can gain market share from unorganized players. Logistics, building materials, plastic products and consumer durables are some of the sectors where the unorganised players’ share is high due to tax evasion. GST would help the organised players to gain market share

    • Logistics companies – generally local truck companies are resorted to for avoidance of tax, but now due to tax credit availability, large companies would move to organised companies who offer better services or can simply outsource the entire activity to logistics companies

    • Building materials like tiles, pipes and plywood have 70% unorganised market due to tax evasion. Post GST due to level playing field, companies with strong brands will become highly competitive and can gain market share

    • Footwear (unorganized share is 55%), Batteries (40%) are other sectors who will benefit
    • Due to CST and higher VAT in some states, Corporates resort to un-economical logistics planning which increase the cost of delivery to customer. Post GST since there is a seamless set off of tax credit availability, corporates can simply focus on optimal logistics structure and cut the freight cost. Bulk commodity sectors like Cement, Steel would stand to benefit.

    • Also GST would push companies to outsource the logistics operation to third party companies who can bring in economies of scale through large warehouses and hub & spoke model to bring down overall logistics cost. So for companies it will be a cost saving and logistics companies would see shift of volumes from unorganised players to them.

     Timeline of events to watch out for

    Going ahead, the Lok Sabha has to pass these amendments, followed by a majority of the state assemblies. Post this, the GST council would be set up, which will then draft the GST bill. It is here that the rates would get solidified. The following would be a broad list of events that one would see, culminating in GST implementation by April 2017:

    • Getting the legal framework in place:

      • Passing of the constitutional amendment bill in the Lok Sabha
      • Ratification from 50% of the state assemblies
      • Presidential assent
      • Cabinet approval to form GST council
      • GST council’s recommendation of model GST laws
      • Cabinet approval for CGST and IGST laws by centre and SGST laws by states
      • Passage of the CGST and IGST laws by centre and SGST laws by states (mostly in the winter session)
      • GST rule notification

    • IT infrastructure for the GST
      • CBEC back-end systems by end-Nov. 2016
      • Back-end systems for 14 states by end-Nov. 2016
      • Back-end systems for CCA, banks, RBI, state accounting authorities by end-November 2016
      • The GST Network would provide front-end and back-end processes for 17 states by end-Dec. 2016.
      • Testing and integration for all stakeholders by Jan.-Mar. 2017

    • Officials (around 60,000) to be trained on the GST laws and the IT framework.

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