As a part of our 3 part series, we have already discussed the Impact of GST on Consumers. Here, we discuss the impact of the new tax regime on various industries in India.
Globally, one can divide the industry in 3 parts –
Primary – Extraction of natural resources, production of raw materials for the other two industries E.g. Mining, Fisheries, Forestry, Agriculture, Oil etc
Secondary – It is also known as manufacturing sector. It involves usage of raw materials to transform it in finished goods which hold value in the market. Eg. Automobile, Textile etc
Tertiary – It is also known as the service sector. They do not manufacture nor produce a product. They give services to various entities of the economy . Eg. Telecommunication, Hospitality, Professionals like Doctors, Chartered Accountants etc.
The tertiary or the Services sector is the largest sector of India. Rs. 73.79 lakh Cr. is the Gross Value Added (GVA) at current prices for Services sector is estimated at in 2016-17. The share of Services sector in India’s total GVA of Rs. 137.51 Lakh Cr is 53.66%. The Secondary sector or the manufacturing sector contributes a share of 29.02% in the total GVA with Rs.39.90 Lakh Cr. Last but not the least, the primary sector contributes Rs. 23.82 lakh Cr to the GVA making it a contribution of 17.32%
Compliance measure have become complex. The need for adapting new technology to meet those compliance is increasing. VComply is GST ready and offers compliance solutions to all industries on a single integrated platform.
India’s textile industry serves employment to 40 Mn people directly and to 60 Mn indirectly. The export size for the FY 2015-16 stood at 40Mn US Dollars.2
The cotton fibre segment and the manmade fibre segment shall be having differential taxation policies. Depending on the nature of raw materials, the GST shall be charged to the industry. The industry has demanded the lowest tax rate of 5 % with no exemptions which shall boost tax compliance and domestic production of textile in the country. Also, it shall assure that there is uniformity in the taxation policies for this sector which shall eliminate the blocked input tax credit existing due to the present tax structure. Yet, there is no clarity on the same.
Input tax credit for textile
To delve further, the players who are focusing on the domestic markets, whose sales will be subject to GST shall be eligible to claim the input tax credit on the domestic capital goods purchased by them (excluding import duty). This shall entail reduction in the capital expenditure of the players and shall be a positive note.
The tax non-compliant suppliers will have to register to enable the buyer to claim Input tax credit due to an organised GST structure.
Cotton Yarn segment (zero rated goods) shall have an upper hand as compared to the man made segment as far as tax rate is concerned.
Exports of goods are proposed to be Zero Rated which shall boost this sector’s growth. The exporters shall be eligible to claim refund of the input tax credit later on. Inter state movement of Goods shall be smoother than before.
GST implemented properly should reduce the burden on all kinds of manufacturers as well as prospective buyers of this industry.
It would eliminate the Octroi duty and other such duties which were implemented by the State before, thus reducing the costs.
The impact of GST on indian car market we need to know what is the present tax structure in different segment.The Present Auto industry tax structure is :
SUVs and big cars — (>1500 cc) Excise 30%+ Cess 1.1 % +VAT 14% = Total 45.1%
Luxury and Prestige Cars — (> 1500 cc) Excise 27 %+ Cess 1.1 % +VAT 14% = Total 42.1 %
Mid Range Cars — (1200 cc to 1500 cc) —Excise 24 %+ Cess 1.1 % +VAT 14% = Total 39.1 %
Small car ( So, currently the taxpayers have a ~45% maximum tax rate. The proposed GST rates can be 5%, 8%,18% or 28%. Depending on which tax slab the above four types fall, the tax rate shall be decided. Domestic automobile companies shall benefit from Zero Rated export policies.
Under the FAME or Faster Adoption and Manufacturing of Hybrid and Electric vehicles, manufacturers shall get incentives if they are venturing in the hybrid and electric vehicle segment. But, this might bring up the cost of cars in this category considerably. The supply chain shall be smoother and much more simpler due to elimination of various other taxes.
The dealers who operate on a low margin might suffer where used car dealers might benefit under the regime.Second hand car dealers shall attract GST on Differential Value only – Sales price – Manufacturing Price. “Deemed Credit” of 40% of the Central GST might be available to the traders on the transition stocks which is not fixed yet. Eg. Central GST of 20% shall entail availment of 8% of credit on the transition stocks. Under GST, stock transfers from one state to the other shall be subject to tax while currently there is no tax on the same but there is less clarity on the value to be taken for it.
Engineering, Capital Goods & Power Equipment
As far as the roads are concerned, the interstate movement shall be smoother and less cumbersome. It shall increase the efficiency. It shall also simplify the tax structure of the EPC sector. The electricity, mining and the power sector are bound to see rise in prices and shall get costlier. The jet fuel prices for the Aviation sector will be a hefty sum for Airline companies. Thus, this sector shall see rise in prices.
There is a lot of clarity on the intricacies works contract which was not prevalent in the previous tax regime.
Solar and wind Energy shall fall under the purview of GST . For SOlar energy, any rate above Zero Rate shall see increase in costs. As far as Wind Energy is concerned, it will be at an advantage at a Zero Rate structure.
The industry shall witness a reduction in transaction cost which shall be an immediate positive impact. Furthermore, the pharmaceutical sector currently enjoys various location based tax holidays on its manufacturing.As far as the rates are concerned, there is no clarity as of now, but, the Government would not hike the price of essential commodities like medicines. Decisions regarding continuity of the Area based tax benefits which are being currently availed by the pharma industry shall be of crucial importance.
CENVAT credit /refund has been an issue for the industry. With central GST expected to be a single rate for goods and services, going forward credit accumulation may not be an area of concern. Furthermore, if the legislation provides for carrying forward of the unutilised credit this would be an additional boost to the industry.
CGST will replace IGST which was non-creditable in nature, shall reduce prices.
Inter-State Movement of goods which for various activities like labelling, bottling shall entail GST. However, if the Commissioner grants jurisdictional permission by a special order for movement of goods for Job Work, it shall entail no payment of GST.
The supplies which are sent as samples and other such activities shall be taxed under the new regime which shall increase the cost burden of a company.
The new regime is expected to result in lower home prices due to the reduction in cost for the developers of properties. This would be possible because now, the GST shall be creditable as compared to previous non-creditable taxes like excise, customs, etc.
The passing of credit shall become easier and value chain shall become more transparent. The GST Model Statute stated that one cannot avail input credit on inputs which result in the construction of immovable property, other than plant and machinery. Hence, the builders would most likely pass on the non-creditable tax to their buyers even after payment of GST.
Leasing of commercial properties shall have an impact but one can understand the direction after the rate declaration. As far as residential properties leasing is concerned, it does not attract service tax so will have no impact of GST
Elimination of taxes and cesses which are prevalent now will reduce the charges which the hotels are having to incur now. Thus, there shall be a streamlining of the process and reduction in cost.
Assuming the industry falls in the 18% bracket, the implementation shall not have much additional benefits to this sector but shall only increase the implementation costs
The Global competitors have a much cheaper GST Rate, hence, they shall have a competitive advantage over the domestic players.
On an overall basis, the sentiments in this industry are positive.
Currently FMCG players pay ~25% tax which would change to ~18% for majority of the goods this resulting in huge reduction of taxes. Logistics costs shall reduce due to smoothening of the tax procedures for the players and elimination of the majority of taxes.
If they tax Cigarettes at a higher tax slab, then it shall adversely affect the companies whose major revenue is from Cigarette.
In the new regime of taxation, logistics will venture in a new era of growth. Now, the location of the warehouse would be dependent on the nearness to the manufacturing units and not how much were the State Government is taxing.
The unorganized sector shall come under the purview of the GST. The paperwork for the transporter companies shall reduce drastically, thus, increasing efficiencies. Expect the logistics cost to reduce by a whooping 20%
There would be a streamlining of the overall process , thus , reducing the costs of logistics. There would be a saving in the tax upto 300 basis points. GST will be applicable on the price of the item, without taking into account the reduction in price on account of the exchange. At present, one needs to pay value-added tax (VAT) only on the cash amount paid.
As far as exchange offers, they would charge GST on the price of the item and not the reduced value. Thus, this discourages exchange offer system.
Consumer durables will benefit from improved logistics. Direct benefits up to 200-300 bps in cost savings may accrue. A significant portion of direct benefits will be passed on to end consumers because of a highly competitive market.
The providers have to register State-Wise and this would increase the process and the cost of compliance for the telecom companies. Thus, they would have file at least 3 returns on monthly basis per registration.
The GST is a Destination tax. Thus, they would have to update their Databases on a real-time basis. They would have to decide the place of supply on the basis of the consumer’s registered address. Currently, the rate of Service tax is 15% and GST shall bring it up to ~18% thus, making the services more expensive and this could act as a huge hit on the profits of the telecom industry.
The telecom industry relies on petroleum products for using the power generators to maintain their services 24×7. These products are not under the purview of GST. Thus, telecom players cannot pass on the credit further which creates a cascading effect of taxes on their prices.
Various services provided by the Telecom industry shall increase the confusion until cleared by the Government through official notifications.
Thus, the Government should opt for an interactive approach to announce more clarifications on matters relating to various industries. This shall solve the genuine issues and concerns before it is too late for the economy.Add to favorites