It is widely debated whether India’s new Goods and Services Tax (GST) will bring about any positive change for its economy, but it will arguably prove to be the first step towards plugging the leaks of the current indirect tax structure which it aims to replace. A few of the existing structure’s shortcomings are:
- Increased costs of domestic manufactured goods, making them less attractive to end consumers compared to foreign goods;
- Increased level of fragmentation in the Indian market due to the imposed taxes;
- Decreased revenue efficiency for the central government and reduced administrative control by the central and state governments;
- The issue of “hidden taxes”: little to no sharing of tax information at each level of value addition.
What is the GST all about?
The Goods and Services Tax is essentially a tax which will be levied only once as the good or service moves from the manufacturer to the end consumer – unlike the previous taxes, which were levied multiple times over the goods’ movement from one state to the other, which ultimately increased its final cost. Under the GST, the following taxes stand to be subsumed at various levels:
Components of the GST
The GST would comprise of two broad components: one each at the central (CGST) and state level (SGST). Simply put, both will be levied simultaneously on the supply of goods and services across the value chain. The central and state governments will levy and collect their respective components of the overall tax. They will work by discharging the tax credit with the liability at each level’s output. This is applicable for both the CGST as well as the SGST over all those goods and services which fall under its purview.
The Likely Impact of the GST
- A shift from the informal sector to the formal sector: This would include the industries of plywood, cement, batteries and allied industries, which would now fall under the tax net.
- A negative impact on the telecoms and automotive sectors: With the increased service tax rate pegged at 18% rather than the current level of 15%, the auto sector could have a mixed response from the GST’s implementation based on the level at which the tax rate is pegged
- Pharma, FMCG (fast-moving consumer goods) and consumer durables will be in a more favourable light: Since these sectors have a comparatively longer value chain from the supplier to the end consumer, they will be able to generate substantial savings over their distribution costs. However, a suitable GST rate of 18% would help in generating the above mentioned result, as most of the FMCG sector’s firms pay around 23-25% in their taxes.
With an increase in transparency in a single tax structure, there will also be an ease of doing business for both local and foreign players. There will likely be an influx of FDI (foreign direct investment) over a period of time which would also lead to an increase in the country’s employment opportunities. in terms of increased FDI.
Even the central government would stand to gain political support for its ‘Make in India’ campaign which aims to make India self-sustainable in terms of production. Thus, the GST appears to be a door of opportunity for the economy, as well as the end consumers who would stand to gain the most from it.