The GST Council finally announced the specific rate slabs under the GST Bill. At the lowest level of GST will be the exempt goods which will carry 0% GST and these will be the basic necessities constituting nearly 50% of the CPI basket. The next slab will be the 5% slab, which will cover items of mass consumption and will also a part of the CPI basket. Above that will be the Standard Rate (12% and 18%), which will apply to a majority of the remaining goods. At the highest level will be the Sin Tax slab which will levy 28% GST, which will apply to products like cigarettes, aerated drinks, high-end perfumes, luxury cars etc. This 28% GST slab will also entail an additional cess, where required, to put the rate at par with what such products are paying now.
Under the GST Bill, the central government will be compensating the states for any revenue loss on account of GST. It is estimated that in the first year of GST (2017-18), the central government will compensate the states to the tune of Rs.50,000 crore. However, the bigger question is; what will be the key implications of GST. Here are 4 key implications one needs to understand.
What does GST mean for inflation?
The general experience in other countries has been that the introduction of GST has led to inflation going up by nearly 2% in the first couple of years, although this tends to get compensated by improved efficiencies and higher productivity after that. One of the reasons for higher inflation is that GST happens to be a consumption tax unlike excise duty which is a producer tax. Hence price increases get transmitted seamlessly under GST. However, in the Indian context the impact on inflation may not be that high. Firstly, more than 50% of the CPI basket has been kept at 0% GST. Secondly, items of mass consumption have been placed under the 5% GST bracket. These two factors will ensure that inflation does not get impacted sharply as a result of GST.
What does GST mean for the services sector?
One of the sectors that is likely to see a higher incidence post GST is the services sector. Currently services tax is charged at 14% and on top of that there is a 0.5% Swacch Bharat Cess and another 0.5% Krishi Kalyan Cess. This takes the total rate of service tax to 15%. Under the new GST dispensation, the rate of tax will be 18% and that will make most services 3% costlier. So, whether you are paying your mobile bill, insurance premium, stock brokerage or for any consultancy services; you will have to shell out 3% more. However, there is major advantage in the GST which will reduce this impact.
For that, you need to understand cascading effect of the current tax structure. Currently, if you pay state VAT or CST on equipment purchased to render a service, then this cannot be claimed as credit against your service tax paid. This leads to double taxation. Under the GST regime, all these taxes get subsumed into a single GST. Hence all credits will become automatic and seamless. By eliminating double taxation on services, a large part of this higher service tax burden will get compensated.
Impact on logistics and distribution
This is one area where the impact will be the widest and also the deepest. Take the case of an FMCG company which manufactures goods in Maharashtra and distributes its products across India. It will have warehouses in each state based on the specific state rule on imposition of sales tax and VAT. The result is that the distribution structure of that FMCG Company is determined more by state-level tax structures and is therefore not optimal in an economic sense. Under the GST regime, such classifications and structures become redundant. The entire distribution and procurement structure of the company will be based on economic reality rather than state taxes. This will make the distribution structure more realistic and efficient. That is why it is expected that GST will open a multi-billion opportunity for logistics companies in India.
What does GST mean for cash flow management?
A major impact of GST will be on how Indian companies manage their cash flow. Currently, a manufacturer pays excise duty at the point of removal of the goods from the factory. Thus the cash flow for that manufacturing unit needs to be structured in such a way that the company has enough liquidity to deposit the excise duty when required. Under the GST, there will be no excise duty payable since it gets subsumed into the GST. Since GST is a consumption level tax, there is nothing payable at a factory level. While precise numbers are not available at this point, it is estimated that this could free up huge cash flows for the manufacturing companies.
Finally, how will GST impact the GDP?
This could be the real big boost from the GST. It is conservatively estimated that the GST passage could result in the annual real GDP growing by 2% higher. On a GDP base of $2 trillion, this translates into an annual income accretion of $40 billion. This spurt in GDP growth is likely to come from a seamless all-India market and greater efficiencies secured in procurement and distribution. That could be the real big take-away from the GST!