The long wait for a harmonised indirect tax system in India will soon be over with the introduction of Goods and Services Tax (GST) system from July 1, 2017. After the passage of four GST Bills (Central GST, Integrated GST, Union Territory GST and GST Compensation to States), the state GST bill needs to be passed in each state legislative assembly and in the Union Territories (with legislative assembly) before the GST is rolled out. The GST Council has made a commendable effort in achieving consensus on the GST bills, hopefully resulting in a smooth passage of the state GST bill in the forthcoming sessions of all state legislative assemblies.
The GST Council has assigned tax rates for commodities (according to the Harmonised System Nomenclature (HSN) Code). The distributional impacts of GST across different socio-economic groups will largely depend on applicable tax rates to different commodities and services and differences in consumption patterns and total consumption expenditure. A tax incidence analysis based on proposed tax rates across states and locations (rural and urban) could help the government to understand the equity aspects of the proposed tax system.
As already decided by the Council there will be four different GST rates (5%, 12%, 18% and 28%). In addition there will a special rate of 3 percent on gold. It is expected that the Council will come up with a short list of exemptions, comprising some essential goods and services. The Council has also set a maximum GST rate of 40% as an enabling provision without the need for parliamentary approval to increase GST rate if required in future. There will be an additional ‘GST compensation cess’ over and above the highest GST rate on some demerit goods (e.g., tobacco products, aerated drinks) and environmentally detrimental goods (e.g., coal). The proceeds of the cess will be put into a separate fund. The fund will be used to provide compensation to states for any revenue loss during first five years of the introduction of GST. Setting GST rates for a vast list of commodities was a real challenge before the Council, however the process could have been simplified by getting rid of price based tax setting approach as prevalent in the present tax regime (e.g., footwear costing up to INR 500 will attract 5 percent GST, whereas the rest will attract 18 percent GST). This keeps open the scope for misallocation of sales into low tax bracket commodities.
After the end of the compensation period, it is expected that the cess will be subsumed under the GST rate, except clean environment cess. The Council has also decided on the highest rate for the cess for different commodities, like 135% for pan masala, 15% for luxury cars, INR 400 per tonne of coal. Extending the list by including a few more environmentally harmful commodities would be desirable to initiate the next level of environmental fiscal reforms in India. The actual rate for GST compensation cess for different commodities is yet to be decided.
The Council has also discussed that GST compensation will be based on a 14% nominal growth rate of revenue across all states with respect to revenue collected in the financial year 2015-16. GST compensation to states will be decided on the basis of net revenue, excluding revenue accruing from non-GST items. For non-GST items, except entry tax, all other taxes (e.g., sales tax, central sales tax) and cesses will continue to be levied and it is expected that central government will compensate states for any revenue loss on account of scrapping of entry tax on non-GST items.
The emergence of a common market in India will be contingent upon harmonisation of the GST rate across states. Deviation from the common rate by any state may lead to a higher compliance burden for businesses with pan-India operations. It is not yet clear whether tax preferences/ exemptions given by different states under industrial incentive schemes will continue under the GST regime. If not, industries may demand alternative incentive schemes. If such provisions take the form of tax incentives, they will continue to erode the tax base of the concerned state.
The GST Council has decided to set the threshold for GST registration at INR 2 million (USD30,000) (INR 1 million for special category states). Businesses with annual turnover of up to INR 5 million (USD75,000) will have the option of a composition/compounding scheme. The applicable tax rate is 2% for manufacturers, 1% for traders, and 5% for restaurants.
GST and petroleum products
Since the Council has already set an enabling condition by setting maximum GST rate to 40%, and reached a consensus to levy cess over and above the GST rate for environmentally harmful goods, the inclusion of petroleum products (like petrol, diesel, and aviation turbine fuel), natural gas and crude petroleum under GST should be easier now. Imposing a standard GST rate for such non-GST items with an additional state-specific regulatory levy could achieve revenue neutrality. Given that institutional structure required for inclusion of petroleum products under GST is already in place, the GST Council can consider extending the GST regime to petroleum products in near future to avoid cascading.
In the GST regime, the GST Council has proposed monitoring prices of the commodities closely and it is expected that businesses will pass on the benefits of reduction of tax rates to consumers. There will be sectors where benefits on account of reduction of tax rates, cascading of taxes, and transaction costs associated with inter-state transactions will provide additional profit margin, which in turn should encourage investment and competition. While the provisions in the law will continue to exist, it would be useful for the Council or tax departments to rely more on market competition and less on enforcement to ensure pass through of such benefits. This way, GST could be presented as a compliance friendly rather than enforcement intensive tax regime.
The success of the GST system in terms of tax compliance and revenue mobilisation will largely depend on modernisation and the simplification of tax administration; provision of incentives for tax-invoice-based transactions; facilitating voluntary compliance by simplifying rules and regulations; providing taxpayer services; tax coordination and automatic exchange of information across tax jurisdictions; and effective tackling of tax evasion and tax frauds.
Possible impacts of GST on Indian Logistics Infrastructure
The introduction of GST is expected to have multi-dimensional impact on Indian logistic infrastructure. Under the GST system, harmonization of tax rates across states and removal of taxes on inter-state movements of goods will be major drivers for re-organization of supply chains of businesses. It is expected that efficient management of supply chains could play an important role in achieving higher cost-efficiency in production and distribution of goods and services for businesses which have larger backward and /or forward linkages. Businesses will look for inputs which are cost effective as well as high quality to produce quality outputs. Since there will be no tax on inter-state movements of goods, all businesses will get equal opportunity to cater to pan-India market. However, success of any business will depend on access to wholesalers and distributors chains. If the price advantage of the goods could nullify the transport costs as well as transaction costs associated with transportation, there will be no bar for any business to cater any markets in India. There is a huge scope for emergence of Business-to-Business (B2B) e-commerce market place and linking e-commerce with logistics chains could facilitate achieving ‘One India, One Market’. This required adequate logistic infrastructure to support transportation of goods of such a volume from one place to another. This is the arena which will attract large investment post the introduction of GST. Moreover, it is not only transportation infrastructure but also availability of ancillary infrastructure services (e.g., storage – dry and cold, warehousing) which will improve market efficiency. If the availability of existing infrastructure is not adequate to support the expected demand for transportation services, it will be a constraint to reap the benefits of introduction of GST in terms of efficiency gains in production and distribution of goods and services. Therefore, gains from GST will be contingent upon availability of infrastructure to support movements of goods everywhere in India.
Role of Indian Railways
Railway is the preferred mode of freight transport if we consider transaction costs associated with inter-state movements of goods (e.g., delays in check posts, toll tax, compliance costs associated with multiple documentation). However, over the years road freight transport has become a preferred mode of transport in India due to delays in railway freight movements, damages/ losses of goods in transit, high cost vis-à-vis road transport etc. There is no doubt that railways could regain the freight transport market again if problems associated with railway freight transportations are resolved, and adequate capacity is created.
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