IMPACT OF GOODS AND SERVICES TAX ON CONSUMERS AND TRADERS IN INDIA

India’s biggest tax reform since independence is expected to be positive for the fast-moving consumer goods (FMCG) companies and firms producing consumer durables. This historic tax reform will irrevocably impact consumers, traders, businesses as well as the revenue collection machines of the States and the Centre.

Goods and services tax (GST) is divided into five categories. i.e. 0, 5, 12, 18 and 28 percent. It must be clarified that the tax will be levied along additional cess. So the rates for different products may increase. For example, the luxury cars are placed in the highest slab of 28 percent but GST Council levied an additional cess of 15 percent which will add up to total 43 percent.

FMCG Sector will benefit from the GST due to current huge unorganised market. GST rate for products like hair oil, soaps and toothpaste has been lowered by 500-600 basis points from the previous rates. Companies such as Colgate-Palmolive, HUL, Britannia, Heritage Foods etc will benefit from the move.

Pharma and healthcare: Pharmaceutical products will see 12 per cent GST as against earlier rate of 10 per cent. The Healthcare Sector will remain exempt from the GST however the inputs by the healthcare sector will be taxed at 18 per cent leading to rise in the operating costs.

Airlines: Travelling in business class will become expensive as after the rollout of GST, tax rate will increase from 9 per cent to 12 per cent. However, GST on economy class is set at 5 per cent, lower than the previous 6 per cent. Aviation Turbine Fuel has kept outside the GST and the indirect tax structure will continue. As a result, aviation companies will now face two set of taxes, i. e. GST and indirect tax. Tax input credit under the GST is only available on input services for economy class travel. Lower tax rate on economy travel is positive for companies like InterGlobe Aviation, Jet Airways and SpiceJet.

Telecom- The Sector is facing severe pressure in the form of intense competition from Reliance Jio. Under the GST regime, telecom services will be taxed at 18 per cent as against 15 per cent earlier. There are expectations that it will work as a salt on the wound for the sector. Any price increase will further dampen the scenario. Bharti Airtel, Idea Celluar and Reliance Communication should be eyed on stock market.

Automobile and auto ancillaries- The GST rates are mostly expected to be neutral to the Auto Sector except for the hybrid cars which will be taxed at the 28 per cent GST +15 per cent cess. Most other vehicle categories will not see significant change from the current tax structure. Tractors category will be taxed at 12 per cent against current 6-7 per cent which will be negative for the tractor companies. Demonetisation and Bharat Stage (BS) III norms have already hurt the Sector during the first half of 2017. Under the GST, input tax credit will not be available for the dealers for the stocks existing before 1st July hence companies are offering discounts on their vehicles. Stocks such as Exide Industries, Minda Industries and Amara Raja Batteries should be watched by investors.

Real Estate- The effective GST rate on under-construction real estate projects will be 12 per cent only and not 18 per cent as there will be abatement for land cost. Brokerage firm Edelweiss in a research note said, “We believe impact on property prices under GST will be driven by cost structure and extent of input credit available under GST passed to buyer.”

HOW WILL TRADERS BENEFIT FROM GST?

• Traders below Rs 20 Lakh annual turnover are exempt under GST as compared to the current threshold of Rs 10 Lakh in indirect taxes.
• Traders manufacturers and restaurants with up to Rs 75 Lakh turnover can go for the Composition Scheme and pay 1, 2 and 5 per cent tax respectively. Such businesses though will not get input tax credit but will have to file only one quarterly return.
  Rest of the traders will have to file three returns every month out of which two will be auto-populated.

The input tax credit under Central Value Added Tax (CENVAT) credit will be carried forward into the new regime.

Integrated GST (IGST) and GST Compensation Cess would be levied on cargo arrived on 1^st July 2017. Cargo arrived up to June 30 would not attract IGST and compensation cess even though the clearance may happen after 1^st July 2017. However, additional duty of customs would continue to be levied for imports of petroleum and tobacco products.

It is mandatory for all importers/ exporters to declare GST Registration Number (GSTIN) along with Import Export Code (IEC) in the bills of entry, shipping bills and courier forms. Provisional IDs issued by Goods and Services Tax Network (GSTN) also be declared during the transition period. Input tax credit of IGST would be available based on GSTIN declared in the bill of entry.

Exports are zero-rated under GST. Exporter would be entitled to refund of IGST paid on exports or refund of accumulated tax credit on inputs used towards exports. Refund of IGST for exports would be based on GSTIN declared in the shipping bill.

Taruna Verma

Senior Associate

The Indian Lawyer