GST

WHAT IS THE GST?

Ministry of Finance has released its Model Goods & Services Law on June 14, 2016. It's a blanket indirect tax that will subsume several indirect state and federal taxes such as value added tax (VAT) and excise duty, and different state taxes, central surcharges, entertainment tax, luxury tax and a slew of related levies by local bodies.

The GST is likely to be at 18 per cent, and is widely to be implemented from 1st July 2017.

GST is a 'destination-based' tax, which means it's charged where goods are consumed, as opposed to where they are produced. Because it shifts the power that several Indian states have had in imposing indirect taxes on the production and movement, a centralised GST Council has been set up that will decide which taxes will fall in the purview of states and which can be subsumed into the GST. A dispute resolution mechanism will also be established to resolve any GST-related disputes.

OBJECTIVES OF GST

  • One of the main objective of Goods & Service Tax(GST) would be to eliminate the cascading effects of taxes on production and distribution cost of goods and services.
  • The exclusion of cascading effects i.e. tax on tax will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country.
  • It is felt that GST would serve a superior reason to achieve the objective of streamlining indirect tax regime in India which can remove cascading effects in supply chain till the level of final consumers.

For the existing businesses we can provide comparative statements of the last 3 years financial results with the projected statements for the subsequent two years to facilitate roll over/Enhancement of the continuing financial facilities as per the requirements of financial institutions/banks time to time.

GST IMPACT ON YOUR BUSINESS

India's new Goods and Services Tax (GST) will significantly improve the country's business environment. If GST is implemented effectively, it will have large-scale benefits for multinational companies at all stages of the supply chain, including procurement and sourcing, manufacturing, distribution, and pricing. In this post, I will discuss the implications of GST for multinationals importing into India and for those manufacturing in the country.

Two benefits for companies importing into India:

  • Imports as an interstate trade: The GST will streamline the import framework in India as additional customs duties will be consolidated into the GST. Imports will be taxed as interstate trade within the country at the IGST rate. Importers will also be able to claim input tax credit on IGST, reducing costs even further.
  • Distribution and inventory management: Under the current system, firms must pay a Central Sales Tax (CST) on interstate sales, which increases costs. To avoid this tax, multinationals open small warehouses in the states where they supply and transfer stock to the warehouses instead (stock transfers are not subject to CST). Under GST, these tax boundaries between states will disappear, and the focus will shift to service times and operational efficiency rather than tax efficiency. This will allow companies to open large, central warehouses to maximize efficiency and reduce costs. Multinationals will also be less dependent on smaller state distributors and will be free to work with more cost-effective larger national distributors.

Four benefits for companies manufacturing in India:

  • Lower costs: GST will reduce the cost of goods for firms manufacturing in India. This is because firms will be able to source materials from across borders without paying additional taxes and will also be able to claim tax credit on supplies sourced across state borders.
  • Factory locations: Under the current system, factory locations are chosen based on state incentives and tax subsidies. GST will allow companies to decide on factory locations in a tax-neutral environment, based on commercial and productivity factors.
  • Clustering and economies of scale: GST will encourage companies to make factory location decisions based on productivity criteria, which will result in consolidation of the manufacturing sector. Natural clusters will thus emerge, allowing multinationals to benefit from economies of scale.
  • Distribution networks: Similar to importing firms, manufacturers will also benefit from improved distribution networks and more efficient inventory management systems.

The most important benefit for multinational companies with manufacturing capabilities in India will be a fundamental mindset shift regarding how decisions are made. Tax considerations will be replaced by commercial viability considerations, which will lead to more efficient and profitable business units.

Some general benefits for all multinationals:

  • Consolidation: All multinationals will benefit from consolidation of the indirect tax system in India. FSG’s one-stop portal will make filing easier, reduce compliance costs and minimize the cascading effects of multiple taxes.
  • Factory locations: GST will also level the playing field between multinationals and local competitors, as a larger share of the informal sector will be subject to the new GST system. As tax avoidance becomes increasingly difficult, local competitors will find it harder to undercut prices, reducing the price differential between local companies and multinationals.
  • Clustering and economies of scale: GST will encourage companies to make factory location decisions based on productivity criteria, which will result in consolidation of the manufacturing sector. Natural clusters will thus emerge, allowing multinationals to benefit from economies of scale.

In the long term, if it is implemented efficiently, GST will allow multinationals that are currently importing to consider opening manufacturing units in India. Multinationals with manufacturing capabilities may consider expanding their footprint as a result of lower costs and gains from the economies of scale. Such large-scale changes in operations warrant an evaluation of the GST’s potential impact on companies’ supply chain.

GST'S IMPACT ON VARIOUS SECTORS

GST will turn India into one common market, leading to greater ease of doing business and big savings in logistics costs from companies across all sectors. Some companies will gain more as the GST rate will be lower than the current tax rates they pay, others will lose as the rate will be higher than the present effective rate. While the rate of GST is yet to be decided, industry observers have assumed an 18% rate recommended by a government panel in making their impact calculations. That the likely positive and negative impact across sectors.

TECH

  • Positive GST will eliminate multiple levies. It will also allow deeper penetration of digital services.
  • Negetive : IT companies can have several delivery centres and offices working together to service a single contract. With GST, companies might require each centre to generate a separate invoice to every contracting party. Duty on manufactured goods is going to go up from existing 14-15% to 18%, which means the cost of electronics from mobile phones to laptops will rise.
  • Clustering and economies of scale: GST will encourage companies to make factory location decisions based on productivity criteria, which will result in consolidation of the manufacturing sector. Natural clusters will thus emerge, allowing multinationals to benefit from economies of scale.

In the long term, if it is implemented efficiently, GST will allow multinationals that are currently importing to consider opening manufacturing units in India. Multinationals with manufacturing capabilities may consider expanding their footprint as a result of lower costs and gains from the economies of scale. Such large-scale changes in operations warrant an evaluation of the GST’s potential impact on companies’ supply chain.

FMCG

  • Positive Companies could generate substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated. FMCG companies pay nearly 24-25% including excise duty, VAT and entry tax. GST at 17-19% could yield significant reduction in taxes. Warehouse rationalisation and reduction of overall tax rates, is expected to generate saving which could cumulatively range between 200-300bps.
  • Negetive : If the recommended 40% “sin/demerit” GST for aerated beverages and tobacco products is levied, then prices may increase by over 20%. Food companies: many see increase in effective tax as many companies enjoy concessional rate of excise.

ECOMMERCE

  • Positive GST will help create a single unified market across India and allow free movement and supply of goods in every part of the country. It will also eliminate the cascading effect of taxes on customers which will bring efficiency in product costs.
  • Negetive : The tax collection at source (TCS) guidelines in the GST regime will increase administration, documentation workload for ecommerce firms and push up costs.

TELECOM

  • Positive Handset prices likely to come down/even out across states. Manufacturers are also likely to pass on to consumers cost benefits they will get from consolidating their warehouses and efficiently managing inventory. For handset makers, GST will bring in ease of doing business as they may no longer need to set up state specific entities and transfer stocks to them and invest heavily into logistics of creating warehouses in each state across the countries.
  • Negetive : Call charges, data rates will go up if tax rate in the GST regime exceeds 15%. Tower firms won’t be able to set off their input duty liabilities if petro-products continue to stay outside GST framework.

AUTOMOBILES

  • Positive On-road price of vehicles could drop by 8%, as per a report by Motilal Oswal Securities. Lower prices can be construed as indirect stimulus to boost volume.
  • Negetive : Demand for commercial vehicles may be hit in the medium term. GST will subsume local taxes, reduce time at check-posts, ease logistics hurdles. With fleet productivity increasing, operators may not feel the need to expand mid-term.

MEDIA

  • Positive DTH, film producers and multiplex players are levied service tax as well as entertainment tax, GST will bring major change and uniformity in businesses. Taxes could go down by 2-4%. Multiplex chains will save on revenues as there will be a more uniform tax, unlike current high rate of entertainment tax levied by different states. It may lower the average ticket price, and increase the footfalls in multiplexes. GST will be a big boon to film producers and studios that currently pay service tax on most of their cost, but cannot charge input credit on creative services (payments to artists etc) as they fall under the negative list. Under GST, they will be able to claim credit of these services also, which will help is lowering the overall cost.
  • Negetive : Demand for commercial vehicles may be hit in the medium term. GST will subsume local taxes, reduce time at check-posts, ease logistics hurdles. With fleet productivity increasing, operators may not feel the need to expand mid-term.

INSURANCE

  • Negetive : Insurance policies: life, health and motor will begin to cost more from April 2017 as taxes will go up by up to 300 basis points.

AIRLINES

  • Negetive : Flying to become expensive, as service tax will be replaced by GST. Service tax on fares currently range between 6% and 9% (depending on the class of travel). With GST, the rate will surpass 15%, if not 18%, effectively doubling the tax rate.

CEMENT

  • Positive: The effective rate of tax for cement companies is now 25%. If GST rates are fixed at 18-20% then the overall tax incidence will be lower GST IS expected to lead to savings in transportation cost, which currently comprises up to 20-25% of total revenue. One common market will bring down the number of depots in the country. Ultratech states that its depots will come down to 100 from 550 at present
 
     
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