Embracing the Uniformity

After creating ripples for years, it is finally time for the nation to embrace GST, “one nation, one market, one tax”! A dynamic change in the business environment is on the cards, which promises to eradicate the cascading effect of the present day tax structure but poses new challenges and questions which any reform has to offer, during its course of implementation. The firm stand by the government of the day speaks volumes, as requests to defer the GST roll out by even a few months has fallen deaf ears.

In line with our federal structure, a dual GST model has been formulated, comprising State GST (SGST) and Central GST (CGST) for all intra-state transactions and an Integrated GST (IGST) for inter-state ones, with specified tax slabs fixed at 5 per cent, 12 per cent, 18 per cent & 28 per cent. Like India, Canada, is the only other nation, which is known to have a dual GST model. While the businesses and corporations are busy in demystifying the complicacies of the proposed transition, what matters more to the growing Indian middle class is, the “pocket pinch” and not the benefits of input tax credit the reform has to offer.

With various analysis flooding the market, the FMCG sector is touted as a “clear winner”, with tax exemptions on consumer staples, viz. milk, fruits, vegetables, grain and cereals. Other day to day consumables like sugar, tea, coffee and edible oil are slated to be taxed at the lowest rate of 5 per cent. The automakers may not be gaining much but can surely pass on the marginal benefit to the consumers. A reduction in tax rate on coal from 11.69 per cent to 5 per cent will not only make the cost of electricity generation cheap but also cut down the input cost for steel & cement industries.

Commenting on GST’s impact on residential real estate, Edelweiss Securities said, "We expect GST to be positive for the sector, with property prices likely to soften by 1-3 per cent. Impact could vary depending on extent of input credit transferred, cost structure and property completion status." However, the news isn’t good from all fronts as the consumer durable sector may consider a price hike with air-conditioners, refrigerators and washing machines attracting the peak tax rate.

With more winners than losers around, it remains to be seen as to whether this will transform into consumer benefits? With implications impacting the earnings of the corporations, will the businesses comply with the “anti-profiteering” clause in the GST law? A clause which mandates and obligates the businesses to pass on the cost benefit, arising owing to this transition into the new tax regime, to the consumers.

With statistics favouring inflation after imposition of GST, the anti-profiteering clause may help in curbing the same. In 1994, Singapore endured an inflationary spike after introducing GST. Malaysia could mitigate the inflationary risk as the prices after implementation of GST were regulated by the Ministry of domestic trade and consumer affairs. Many countries have even been forced to increase the tax rates after introduction of GST but Canada is known to have reduced the GST rates post implementation. With revisions in slabs for certain sectors already doing the rounds, this transition to uniform taxation regime is not going to be a smooth ride. It all majorly depends on how the market absorbs the repercussions and aftershocks of this dynamic transition.

While the consumer is busy figuring out the additional pocket expenses that the increased duty structure in mobile and telecom sector has to offer, our Finance Minister believes that, “Net effect of GST implantation won’t be inflationary. Once input credit starts, actual tax incidence will come down.”

We hope that GST will act as a new window of opportunity for investors who refrained from setting up manufacturing units in India, owing to multi-staged and complicated taxation system. Thereby creating scope for employment, backed by efficient governance, increased productivity and reduced corruption! 

The critics are busy finalising their scorecards as “its” days to release are numbered but it shall be great for the nation and its citizens if the positive impacts of “expectations” outnumbers the clouts of apprehensions.

All hail GST- Embrace the Uniformity!! 

~Arijit Sinha, PGPEx 2016-2017, Indian Institute of Management, Shillong