Sep 26, 2016

What effect will the GST have on business?

R Jayaraman

After a lot of political manoeuvring and chest thumping, the GST bill has been passed and the run in fact has been so fast that the President has already signed the bill before anyone could say “Timbuktu”. One is reminded of the popular Rajnikant joke that he came first as usual; Einstein was stunned that light came in second!

GST has gotten into India after many years of VAT, and is another milestone in the tax structure. In the days after independence, there was a great fear that businessmen will enrich themselves at the expense of the country if left free, and so, many layers of safeguards were built around their activities. Those who did all this didn’t reckon that these self-same safeguards will give rise to another monster – the corrupt politician. Unfortunately, the political class will find it difficult to live down this reputation. It will take many years before the country will even begin to forget the illegalities, the continuous cheating, the back stabbing and small minded thinking that this licence and permit raj brought about in its wake.

In all the actions after independence, this one aspect of the nation’s business development is perhaps the most painful one, and the most costly mistake. It is a carryover of the “lack of self-respect” of the Hindu that Subramanian Swamy, Rajiv Malhotra and others of their class talk about – we lacked the vision that the opening up of industry will usher in an era of prosperity instead of one that would lead/continue the exploitation. Experts and pundits will keep debating whether this was the right way to go, but the political leadership of those early years believed more in the negative effects than in the beneficial ones of business.

Now that the GST has become a reality, the business world in India needs to redeem itself and chart a new path of development, wealth creation and equitable distribution, sustainable growth and world class quality. The challenges confronting the Indian business community are far more multifarious than ever before. Just imagine the western business world has had an uninterrupted run of free enterprise over the last 100 years which has seen unbridled growth without the fetters of sustainability, conservation, environmental pollution and so on. These new factors, which are the results of the damages done by the huge consumption and growth, and which have made the cost of doing business a lot more than what it was before, have started affecting adversely the cost of doing business only in the last 10 to 15 years or so. And now the Indian industry will have to bear the full brunt of this increase.

The GST – consisting of CGST, SGST and IGST – is another attempt to smoothen the myriad tax laws that govern interstate transfer of goods. While the VAT tried to remove the double counting of taxes applicable for sales between companies in creating the final product, the GST will remove the layers of taxes and documentation that need to be done now to get goods across state borders.

Take for example, a producer in Maharashtra, who wants to sell goods in West Bengal. He has to transfer the goods using a C form which will allow for a tax free transport to WB. If the C form is not given, then the WB state sales tax of about 10%+ will be levied on the CIF value of the goods that leave the Maharashtra factory upon entry into WB. On top of this, the CST will become applicable when the goods are sold in WB. So there is an additional tax element of about 15% on the FOB value. Now this amount will be subsumed in the GST as IGST and will not be that high, providing some relief. Differential tax rates can be avoided to some extent, based on the rates that are finally decided by the central authority.

States where manufacturing happens will not get any revenue for the materials leaving the State. Earlier they would levy the State Sales tax on such transfers based on which the C form could be raised to avoid tax in the consumption state. Thus manufacturing states that stand to lose out on tax will be compensated for five years. By then, some mechanism will have to be found to remove this inequality.

The fact is that a whole host of central and state taxes – including Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and VAT/Sales tax, Luxury tax, State Cesses and Surcharges relating to supply of goods and services, Entry tax not in lieu of Octroi – will be subsumed under the GST. The entire mechanism will create a smooth tax collection and a transparent linkage structure, with lower sales tax rates overall, will come as a big relief to all those who are interested in doing business. As they say the GST has now announced to the world that India is ready for business.

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