GST has the potential to turn the whole country into a ´common market´ and improve ´ease of doing business.´ However, it is expected to be mostly ´neutral´ to Power Sector.
After a decade of political stand-off, the government was able to garner a consensus in Rajya Sabha, to approve the Goods and Services Tax (GST) constitutional amendment bill in August 2016. Since the parliamentary assent for the bill, which has the potential to turn the whole country into a single ´common market´, things have picked up momentum to make GST a reality at the earliest, though many experts feel that the deadline of April 1, 207 is a challenge.
As many as 16 states have ratified the bill. Being a constitutional amendment, GST requires at least half of the state assemblies to ratify it. As a part of capacity building exercise and to spread awareness of the new fiscal law amongst the tax officers and the trade, CBEC has prepared a compilation of Frequently Asked Questions (FAQs) on GST and was released recently. The first meeting of the newly constituted GST Council comprising of Union Finance Minister, Union Minister of State in charge of Revenue or Finance and Minister in charge of Finance or Taxation or any other minister nominated by each state government was also held in the third week of September 2016.
As a final step, the government is likely to seek presidential assent for making this bill a law that will allow for a single national indirect tax to replace a myriad of state and national taxes.
GST has already been adopted by over 160 countries in some form or the other.
The introduction of the GST regime would create a common market with uniform tax rates across the country. Its main characteristics include, it will be levied on all goods and services, except alcoholic liquor for human consumption and it will be levied on petroleum and petroleum products at a later date, based upon the recommendations of the GST Council. Additionally, an Integrated GST (IGST) would be levied by the Centre on inter-State transactions of goods and services, as well as imports into India, at a rate that would be similar to the sum of CGST and SGST. SGST would not flow to the Consolidated Fund of India, but go directly to the state governments. Moreover, CGST and the central share of IGST would be distributed between the Centre and the States.
Multiple exemptions exist under the present tax system- the Centre has 300 items exempted from central excise duty, while the states (together) have 90 items exempted from VAT. These will be merged into a final synchronized exemption list under the GST regime.
The Dr Arvind Subramanian Committee report on the Revenue Neutral Rate and Structure of Rates for the GST had assessed that 15% or 15.5% may be an appropriate revenue neutral rate (RNR), which the state governments have seen as too low to protect against revenue losses. Around an RNR of 15- 15.5%, the Committee had suggested a structure of GST rates as follows: a low rate of 12% on goods, standard rate on goods and services of 16.9-18.9%, and demerit rate on goods of 40% and a rate on precious metals of 2-6%. (See table)
The GST bill is an important reform which will remove barriers to trade, improve economic efficiency and lead to higher growth in the long run, says Thomas Rookmaaker, Director Sovereigns, Fitch (Hong Kong) Limited, adding that the, parliamentary approval sends a further positive signal of the government´s ability to enact major reforms.
After the recently passed bankruptcy law and GST, the unfulfilled reform agenda includes liberalisation of the FDI regime, financial and agriculture sector reforms, and changes to cut red tape and improve the efficiency of administration.
GST, as a simplified tax regime, would subsume a host of indirect taxes and levies at the Central and state levels, with value-added Central GST (CGST) and State GST (SGST) to be concurrently levied on both goods and services at the point of supply (See table for more details). Since GST subsumes most of the state-level taxes, it would reduce the need for reconciliation at state borders. This could lead to a dismantling of the web of check-posts around the country, thereby speeding up the movement of goods and reducing logistics and inventory management costs.
Dharmakirti Joshi, Chief Economist of CRISIL expects the logistics costs of companies engaged in the production of non-bulk goods to fall by as much as 20%.
´The reduction in the multiplicity of indirect tax rates across States (primarily relevant for goods) would significantly improve the ease of doing business. GST is also expected to remove product-wise exemptions Accordingly, the introduction of a comprehensive GST would reduce the prevailing cascading effect, with tax-on-tax currently being paid as state levies are imposed atop central levies,´ said Aditi Nayar of rating agency ICRA.
The introduction of GST, though positive from a longer-term economic perspective, it should not be allowed have a substantive effect on the government finances in the short term. ´India´s fiscal balances are a weak point of the sovereign´s credit profile, with both general government debt and the deficit well above its ´BBB´ peer medians. Fitch expects the debt to reach 69.4% of GDP and the deficit to fall to 6.8% in FY17,´ says Rookmaaker of Fitch.
Overall, in the economy prices of goods are expected to decline, cost of services to increase, exports to get a boost, says CRISIL Research. The effective indirect tax incidence is expected to decline in GST regime due to removal of the cascading effect arising from the non-availability of input tax credits across the value chain and between states and removal of tax-on-tax (eg. VAT levied on excise inclusive price). The effective tax rate of 26-30% in the current system, will drop to a standard rate of 17-18% under the GST, Joshi feels. However, the prices of goods that are currently exempt from excise duty or sales tax or are subject to concessional rates are set to increase as the list of exemption under the GST will be lowered.
Since GST is a tax on consumption (destination-based), exports would be zero-rated, i.e. export prices would not include any taxes. Currently, exports are reimbursed for central indirect taxes (excise and customs duties), but don´t get full offsets for Central Sales Tax (CST) and certain state-level taxes such as entry taxes and octroi. Tax on Services will go up to 18% standard rate, from 14% currently, CRISIL added.
Impact on Power sector
Many experts feel that the GST will be fixed at 18%. Considering that excise duty on coal is levied at 6%, whereas VAT is levied at 5%, the delivered cost of coal for end users is likely to increase by 5-6% per tonne of coal, though the overall impact would be neutral, CRISIL said. ´Consequently, the variable cost of power generation from domestic coal is likely to increase by 6-8 paise per unit. On the other hand, the increase in variable cost from imported coal is estimated to increase by 12 paise per unit,´ the rating agency added.
The increase in fuel costs are not expected to have any impact on the profitability of power generation companies. Central and stage government projects are based on a ´cost-plus´ principle, by which their tariffs are determined on the basis of actual cost of fuel. Moreover, as per the National Tariff Policy 2016, even competitively bid projects (private sector) are also allowed to pass-on any increase in costs on account of change in taxes and levies (subject to approval of appropriate ´commission´). ´Consequently, we believe that the increase in fuel costs will be passed on to the distribution companies by these generators,´ CRISIL said in the report.
Renewable Energy Sources (RES): GST at 18% will increase solar power project cost by 13-15%. ´Solar modules, which account for 55-60% of total capital cost, and are largely imported, there exists no customs duty. Also, VAT and other levies like entry tax and excise duty, which together are about 5% currently, will increase to 18%,´ says Joshi of CRISIL. However, given strong government thrust to the sector, the GST Council could exclude/ provide a concessional rate to RES.
Segment/company impact: Coming to impact on specific segment, Sandeep Gupta, VP & Head Equity Advisory, Motilal Oswal Securites Ltd (MOSL) said that the battery segment represented by Amara Raja Batteries and Exide Industries, would benefit from reduction in cost disadvantage vis-a-vis unorganized players (45-50% of replacement market).
In home electrical segment, including fans, lights water heaters, air coolers etc., organised sector will benefit from GST, says MOSL. About 25% of fan sales come from the unorganised sector, while lighting has 40% sales from the unorganised sector. Lowering of tax rates from 26-29% to 18% would benefit many home appliances companies.
Impact on related products: As far as Oil & Gas Industry is concerned, ICRA research believes that the GST Bill in its present form excludes a major portion of the industry products thereby excluding the industry from most of the benefits of the Bill besides imposing an additional burden on the industry due to compliance to a dual tax regime. Profitability of the industry could also be modestly hit because of tax related under recoveries is there, said K Ravichandran of ICRA.
CRISIL feels that the impact on steel sector would be ´neutral´; for cement, it is ´positive´ as tax rate will come down from 28-30%; and for telecom and IT services it would be ´marginally negative´ as overall taxes could go up by 3-4%.
-BS Srinivasalu Reddy
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