Will GST bring tax reforms?

The Goods and Services Tax (GST) is set to become operational from July. Rationalisation of taxes is long felt need and the GST structure is expected to deliver. It would replace a cascade of 11 Central and State taxes with a concertina of eight tax rates, defeating the original idea of having a three-slab tax structure. The current GST structure on goods ranges from 0 to 28 per cent.

It is expected to inflate prices of consumer durables like television, air-conditioner, refrigerator and washing machine which may go up by around 3 per cent to 4 per cent. Smaller home appliances like electric irons, mixer grinders and juicers will too become dearer as all will come under one GST slab. However, these should not have been equated with white goods like ACs etc. And, the tax on these would be one of the highest globally and certainly maximum among countries of our size.

All home appliances and consumer durables will now attract 28% tax, which varied for different products earlier. The government should use this opportunity to rationalise rates rather than simply going ahead with mechanical grouping. For durables like TV, AC etc, the cumulative tax (excise and VAT) was around 23% to 28% depending on the State. Prices in cities like Mumbai may reduce as there was additional octroi of 5% on consumer goods.

Further, the tax burden of white goods companies would not rise much due to input tax credit which means companies will get credit for all taxes paid. For example, if a company’s GST liability on a product is Rs 500, it will pay only Rs 400 and will get tax credit of Rs 100 for taxes paid by its vendors and suppliers earlier.

In the realm of health, the switchover to GST is likely to affect prices of medicines which may fluctuate in coming months. Medicines other than baby food, life saving drugs and contraceptives, may feel the push and pulls due to varying GST rates. However, there is no tax on baby foods, 5% on life saving drugs and 12% on all other drugs and 18% on food supplements.

There is a possibility of a price push for drugs which are proposed to be taxed in the 12% slab under GST as against prevailing average taxation of around 9%. The increase in prices of schedules drugs, according to NPPA, is expected to be around 2.29%. Many life-saving drugs that are part of the National List of Essential Medicines (NLEM) are included in the list of scheduled formulations which comprise 25-30% of the pharma retail market. In fact, the Drug Prices Control Order (DPCO), companies have been allowed to increase their MRP by up to a minimum of 10 per cent annually.

Regarding education, the GST Council has rightly decided to exempt services provided by educational institutions to its students. However, services to higher educational institutions are not GST free and they will have to pay when availing these, obviously diluting objectives of keeping educational institutions outside the GST ambit.

It needs to be clarified that GST exemption on procurements is available only to schools from pre-school to higher secondary level. The input or supply of services such as transportation, catering, housekeeping, services relating to admission or conduct of examination in higher educational institutions will bear a GST levy, which partly defeats the purpose. Though the effect may be marginal, some sections feel this may be a deterrent to foreign students.

Coming to garments, GST rates have been reasonably fixed for at 12% for those costing above Rs 1,000 while those below would attract a moderate 5 per cent. The industry has been paying VAT of 5.5-6% and 7-7.5% for garments above Rs 1,000. Similarly, footwear below Rs 500 will attract a modest 5% while those priced above Rs 500 will be taxed 18%. Presently, taxes are more and the switch raises possibility of lower prices.

The GST on gold and silver has been reduced to 3 per cent which is welcome by the industry, especially for artisans in Bengal, as it would give a further boost to the sector, which employs millions. This is a new category as also rough diamonds which has been kept at 0.25%.

Some items like fruits and vegetables have been exempt. When bread could be exempt from tax, pickles and ketchup have been recently reduced to 12% and cashew nuts from 12-5%, GST for biscuits shouldn’t have been fixed at 18% as this is unreasonable.

For industrial products, rates have been fixed at 18% while today a manufacturer pays around 28-30% as taxes, which means a 10% saving. The lower tax rate, simplified tax structure, technology driven easy tax compliance system would obviously give a push to manufacturing and help in increasing its share of GDP from current 17.4% to 25% by 2025. Equally important decision is fixation of tax on coal at 5% against 11.30%, obviously aimed to boost electrification in the country.

It is believed that GST would raise productivity and prices. How much of this would become a reality by combining GST with a clearly articulate manufacturing strategy to attract global investments, create jobs and make India a large manufacturing nation, remains to be seen. Moreover, the buoyancy in the economy expected after GST becomes operational, as envisaged by revenue secretary, would be awaited.

In the hospitality sector, there has been some change with hotel rooms below Rs 1,000 not attracting GST, those costing Rs 1,001-Rs 2,500 to be taxed 12% and between Rs 2,500-Rs 7,500 18% from the earlier 28%. But 5-Star category hotels, i.e. above Rs 7,500, tax will be 28%. Similarly, restaurants in 5-Star hotels will face 18% levy instead of 28% approved earlier. A study by HVS, global hospitality research and consulting firm, found that India would move ahead of cities like Colombo, London, Chicago, Dhaka and Tokyo.

The Council significantly addressed concerns of small businesses by increasing the threshold of turnover for entities that could opt for the composition scheme to Rs 75 lakh from Rs 50 lakh earlier. These traders with turnover below Rs 75 lakh could opt for the scheme and pay taxes at 1%, 2% and 5% respectively, thereby relieving them from GST’s complexity and instead pay a percentage of their turnover.

Meanwhile in the GST Network, the company readying technology backbone for the new regime, dismissed fears that online tool would be too cumbersome for small businesses, arguing that even under the current regime they are using web-based service for VAT and service tax registration. Further, it was working on a scalable model and had enough capacity to deal with a large number of invoices that may be generated -- estimated 3.2 billion.

The 3-stage mechanism has been put in place by the GST Council to deal with consumer complaints, drawing upon the experience in Australia. Finally, one cannot deny that the tax structure has been so designed so as to provide relief to the common man. Though the objective of one nation-one tax has not been fulfilled, the beginning has been made in right direction. However, in the coming two years or so, the government would need to try to at least club the taxes into three slabs.

By: Dhurjati Mukherjee
(INFA)