Impact of Goods and Services Tax (GST)

With the implementation of the Goods and Services Tax (GST), the regime of multiple taxes has changed and in turn, a uniform tax regime has been brought in place. This change has been brought into place keeping the common taxpayers of India in mind.

The implementation of the Goods and Services Tax has marked a significant change from the present tax regime. The service sector is expected to be impacted more with the new changes in comparison with the trading or manufacturing sector. Financial services offered by NBFCs and banks, such as fee-based, fund based and insurance services are all forecast to undergo major changes from the present scenario. GST compliance is also expected to be quite hard to implement in certain sectors like banking due to the volume and nature of operations offered by NBFCs and banks, such as hire purchase, lease transactions, services associated with actionable claims, non-fund as well as fund-based services, etc.

Following are some of the major impacts that the new GST could have on NBFCs and banks:

  1. Problems with registration as there will be an increase in the number of branches

    At the moment, banks and NBFCs with pan-India operations have the ability to discharge their service tax compliances using just one centralised registration, but such NBFCs and banks under GST will have to attain a different registration for every state in which they operate. Apart from registration, the burden of compliance with regards to the filing of returns will also rise substantially so far as the number of return formats, the periodicity of returns and the level of information needed in these returns is concerned.

  2. Leveraging and De-Leveraging of Input Tax Credit

    NBFCs and banks are currently choosing the reversal option which allows them to reverse 50% of the CENVAT credit that has been taken against input services and input. On the other hand, CENVAT credit on capital goods can be taken without any reversal conditions. The cost of capital is expected to increase under GST as 50% of the CENVAT credit taken against capital goods, input services and input can be reversed, thereby leaving NBFCs and banks with lowered credit of 50% on capital goods.

  3. Harder Assessment as well as Adjudication

    Branches of NBFCs and banks would be assessed by the state regulators depending upon the state in which the branch was registered. Under GST, each registered branch of an NBFC or bank will have to offer a justification for its position on chargeability along with a reason for making use of input tax credit in various states.

  4. Account Linked and Non-Account Linked Financial Services

    Since India now thrives under the centralised and digitised scenario, the identification of the state in which the service recipient is located can be quite difficult. Moreover, service recipients such as traders, manufacturers, professionals and other workers transfer or move temporarily to different places when they seek better opportunities, their addresses may be different in the books of the service providers. Details such as current address, permanent address, KYC address and address of communication could be misrepresented in case of account linked financial services, in which case the place from which the goods or services were supplied will serve as the location in which the services is received.

    In case of non-account linked financial services, the location of the service provider will serve as the place in which the service is supplied. Companies that have established a widespread presence in remote areas may be hard-hit by GST as their operations and transactions will have to be carried out from offices situated in some other state.

  5. Actionable Claims

    Under Service Tax, actionable claims are not treated as services and the current regime has no liability for the payment of taxes. However, actionable claims are now treated in the same manner as supply of goods under GST. Services offered between bills discounted and securitisation will all be taxed as they are considered as B2C and B2B services.

    As further details are expected to emerge under GST, financial sectors are in for tough times so far as the manner of conducting business, services matrix, customer profiles, IT systems, etc. are concerned. GST is set to have a major impact on NBFCs and banks in a manner such that they will have to reconsider their entire accounting, operations, compliance and transactions platforms.

Impact of Goods and Services on the Automobile Industry

The Indian automobile industry is fast-growing, and thousands of new cars are produced every year. The present system levies a number of taxes on the sector, such as sales tax, excise duty, motor vehicle tax, value added tax, road tax, registration duty, which are expected to be subsumed by GST.

Currently, VAT is applicable to the sale of used four-wheelers, and the advance received for supply of goods does not attract an excise/VAT and composite rate in certain states. The component makers/OEMs are provided with various investment-linked investment schemes. Interest-free loans associated with CST/VAT payable on sale and subsidies are the two major components of this scheme.

Services or goods sold without any kind of consideration are presently exempted from tax under Service tax and VAT. Dealers and importers are presently exempt from the excise duty and CVD paid by OEMs. Upon the transfer of goods from the factory, no CST/VAT will have to be paid, but excise duty is applicable under the prevailing tax regulations. The vehicles that will not attract Auto/NCCD cess include hydrogen vehicles that operate on fuel cell technology, vehicles that run on electricity, vehicles that are used only as taxis, vehicles that run on three wheels, hospital ambulances and vehicles used by physically handicapped individuals.

VAT and excise duty are currently the only two taxes levied on consumers, and the average combined rate of these taxes ranges between 26.50% and 44%. The rates under GST are expected to be between 18% and 28%. GST is set to lower the tax burden on consumers, although tax implication related to the sale of used cars under the new law is still unclear.

Dealers and importers, on the other hand, are in for good news as they can claim the GST they had paid on sold or imported goods, but they will not be able to claim the VAT and excise duty paid. The GST and IGST law will cover the excise duty costs incurred on stock transfer. GST will also charge tax on the advance received for supply of goods. Manufacturers will be helped in acquiring auto parts at relatively inexpensive rates owing to an enhanced chain supply mechanism implemented by GST.

Presently, a number of warranties or free services are provided by car manufacturers owing to the industry and its considerably competitive nature. These free services or goods will not be subject to tax under the prevailing tax laws, and the warranties and free services will not be taxed under GST.

In conclusion, the implementation of GST is expected to lower the cost of producing cars as various taxes that are presently levied will subsume. The state of consumption will be subject to taxes instead of the state of origin under GST, which would gradually enhance the automobile industry and the rate at which it is growing.

Impact of Goods and Services Tax on the Agricultural Sector

The Goods and Services Tax is a crucial law to enhance the timeline, the reliability, and the transparency of supply chain mechanism. The costs incurred by retailers and farmers would be reduced through the implementation of a superior supply chain mechanism, and there will also be a reduction in wastage. The cost of heavy machinery needed for the production of agricultural goods will also be lowered by GST. Agriculture, under the model GST regulations, does not include stock breeding, poultry farming and dairy farming, and will therefore not attract any tax under GST.

The production of milk in India over FY 2015-16 was recorded at 160.35 million tonnes, marking an increase of over 14 million tonnes from the previous fiscal year. At the moment, milk and a number of milk products are charged at 2% under VAT. However, GST aims at increasing the rate to 12%, which means that there will be an increase on the price of milk. Even the cost of tea, which is among the most common household commodities in India, is expected to increase from the present VAT rate which stands between 5% and 6% in most states.

Impact of Goods and Services Tax on Startups

All taxes that are currently levied on startups will be subsumed by the implementation of GST. Startups are among the few beneficiaries of GST, and here we will look at the various ways in which GST will aid startups and help their growth.

  1. Greater registration threshold

    Business that earn a turnover in excess of Rs.5 lakhs are liable to ensure VAT registration as well as pay the tax under the present VAT structure. The threshold under GST is expected to increase to Rs.20 lakhs, which means that startups and small businesses will be exempted from these taxes. Another scheme under GST, called the composition scheme, which is expected to reduce taxes for small businesses that earn turnovers ranging from Rs.20 lakhs to Rs.50 lakhs. Newly set-up businesses will thereby find respite from tax burdens.

  2. Tax credit on purchases made by Startups

    A large number of startups across India are focussing on the service industry, and pay service tax as a result. However, GST will ensure that the VAT paid on supplies purchased can be setoff with the service tax on sales. For instance, in case a startup purchases supplies worth Rs.10,000 and pays 5% towards VAT, after which it levies a 15% service tax on services of Rs.30,000. It will have to pay Rs.30,000 x 15% = Rs.4,000, and no deductions can be claimed on the VAT of Rs.500 paid towards the purchase of supplies.

    If the GST rate is set at 18%, the GST on the service offered will be Rs.5,400, and the deduction on the supplies purchased will be Rs.1800, and the net GST payable will be Rs.3,600. As a result, GST will benefit the startup industry to a great extent, especially to companies that primarily offer services.

  3. More convenient online procedure

    Right from the registration to the payment of GST, the whole GST process is expected to turn a whole lot easier under the new regime. Startups will no longer have to travel to tax offices in their efforts to get different registrations, be it under service tax, VAT, or excise duty.

  4. Easier taxation

    Since the budgets with which startups work are somewhat tight, they do not have the bandwidth to allocate resources to take care of the tax compliances with regards to service tax, CST, VAT, etc. GST is expected to subsume all these taxes and thereby lower the time taken for such issues. Moreover, startups that deal with goods as well as services will find some leeway when it comes to the filing and payment of one tax rather than service tax and VAT.

  5. Enhanced efficiency in logistics

    India’s logistics industries have had to use multiple warehouses in different states in an effort to avoid the present state entry taxes and CST. These warehouses have also been made to operate at lower capacities which increases their operating costs. Under GST, the restrictions on goods being transferred from one state to another will be removed, thereby brining about warehouse consolidation. E-Commerce players and warehouse operators, as a result of GST, have already expressed interest in establishing their warehouses in strategic cities like Nagpur. Startups will benefit through lower logistics costs, thereby increasing their profits.

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