GST Updates (07 Nov 2016)

New GST structure likely to be non-inflationary

November 7, 2016

New GST structure is likely to be ‘non-inflationary’ as most of the items in the Consumer Price Index basket will be taxed at a rate which is very close to their current levels, says a Citigroup report.

The GST Council has agreed on a 4-tier GST tax structure of 5, 12, 18 and 28 per cent, with lower rates for essential items and the highest for luxury and de-merits goods that would also attract an additional cess.

According to the global financial services major, almost 50 percent of the CPI basket including food grains will continue to be out of the tax net (0 per cent tax), while four ‘sin’ goods (tobacco, pan masala, aerated drinks and luxury cars) will be taxed at their present rates which are much higher than 28 per cent.

“New GST structure likely to be non-inflationary,” Citigroup said in a research note, adding, “it appears that most of the items in the CPI basket will be taxed at a rate which is very close to their current levels”.

According to Citigroup, even if some of the ‘services’ move to 18 per cent tax bracket (from 15 per cent), it is not likely to stroke inflationary consequences if the tax pass-through is smooth.

On the other hand, given that tax rates will be mostly unchanged, the positive growth impact will be felt only through better tax efficiency, the report added.

The report noted that the non-inflationary bias drove the GST rate consensus and bodes well for the introduction of new GST rates from April 1, 2017.

“An early consensus over this complex issue opens up the possibility of further GST legislations being passed in the winter session of parliament and introduction of new GST rates from April 1, 2017,” Citigroup said.

Meeting the April 1, 2017 timeline of GST rollout is now going to depend on technology preparedness and familiarisation of the new GST structure among both the tax payers and tax collectors, it added. Source – [07-11-2016]

Govt hopeful of consensus on vertical division

November 7, 2016

The Centre is hopeful of a consensus around ‘vertical division’ of assessees, one without a turnover threshold, to resolve the issue of dual administrative control under the proposed goods and services tax (GST) regime.

While most states are in agreement over the principle of division in a pre-decided ratio between the two authorities, Kerala, West Bengal and Tamil Nadu have pressed for exclusive state control over those with annual turnover up to Rs 1.5 crore and dual control for beyond that.

Also termed ‘horizontal division’, this threshold formula would ensure states get control over most assessees. By government data, 88% of assessees are below the Rs 1.5 crore threshold.

“A consensus appears to be evolving around the ‘vertical division’ of assessees for scrutiny and audit. Negotiations will centre around the ratio of division. We are willing to do less assessment than states,” said a central official. The ratio could be 1:2 or 1:3 in favour of states.

Resolution of the issue is needed to prevent harassment of taxpayers. “We can’t have two competing authorities for the same assessees,” said the official.

Assam’s finance minister, Himanta Biswa Sarma, told a television channel after the Council meeting on Friday: “When the meeting started, the Council was leaning towards a Rs 1.5 crore threshold but now many states feel that it should be vertical division. We expect the dual control issue to be resolved soon.”

Jammu & Kashmir’s Haseeb Drabu said the state would back a vertical split of administrative powers. While the states had earlier agreed to exclusive assessment of manufacturing units with turnover of up to Rs 1.5 crore, they went back on it as the Centre retained administrative control over all 2.6 million service tax assessees.

Finance Minister Arun Jaitley said after the meeting, “We don’t want to take a decision in a hurry because, administratively, any mistake on this front could be chaotic.”

The finance ministers will have an informal meeting on November 20 to discuss it. “Sometimes ministers in the Council meeting discuss a politically correct stand in the presence of everyone. Informally, they might have a different view,” said an official.

Pratik Jain, partner at consultancy PwC, said: “With services also getting split between Centre and States, it is unlikely the Centre would agree on horizontal division. A vertical division on an agreed ratio seems more viable.”  –[07-11-2016]

With GST on its way, India rises to second spot on global biz optimism index

November 7, 2016

India improved its ranking by one spot in a global index of business optimism, with policy reforms and Goods and Services tax (GST) expected to become a reality soon, says a survey.

According to the latest Grant Thornton International Business Report, India was ranked second on the optimism index during the third quarter (July-September 2016).

Indonesia took the top spot, with the Philippines coming in third.

India was ranked third during the April-June period after being on top for two consecutive quarters.

“The improvement in the optimism ranking in the recent past clearly reflects that the reform agenda of the government and its efforts on improving the climate for doing business are having an impact,” Grant Thornton India LLP Partner – India Leadership Team Harish H V said.

High business optimism was also complimented by the rise of employment expectations. India regained its top position on this parameter, from second position in the April-June period, while profitability expectations also moved up.

“…all the programs and initiatives of the government as well as its focus on building relationships with all major economic powers has made India a bright spot in the global economy,” Harish said, adding the recent push for GST augurs well and should give a further boost to business optimism.

While India continues to be amongst the top five countries citing regulations and red tape as a constraint on growth, for the first time in the year, the country’s ranking on this parameter has dropped from second to fourth.

As per the survey, 59 per cent of the respondents have quoted this as an impediment in the growth prospects compared to 64 per cent in the previous quarter.

The report is prepared on the basis of a quarterly conducted global business survey of 2,500 businesses across 36 economies.

Meanwhile, in terms of revenue expectations, India slipped to third position from top in the previous quarter.

In spite of the downturn, India is much ahead of China where only 30 per cent respondents expect an increase in revenue, whereas in India, 85 per cent respondents have voted in favour of increasing revenue.

The survey further noted that 68 per cent of respondents have voted for an upsurge in selling prices. On this parameter too, China lags India with only 10 per cent of respondents expecting an upsurge in selling prices. The global average is 19 per cent.

Globally, business optimism stands at net 33 per cent, rising 1 percentage point from the previous quarter but falling 11 percentage points over the year.

“Political events such as Brexit and the US presidential election understandably rattle the global economy and test the resilience and elasticity of businesses worldwide. In general, businesses do not like uncertainty, and that is what is happening,” Grant Thornton Global CEO Ed Nusbaum said. Source – [07-11-2016]

Aerated drink makers fume at being put in demerit list

November 7, 2016

Indian Beverage Association has expressed disappointment at the re-categorisation of aerated drinks under ‘demerit’ category in the GST rate slabs, saying at Rs 10 for 200 ml, such drinks are neither luxury goods nor do they pose health hazards.

“Aerated drinks are not ‘luxury’ goods. Aerated drinks cater to the average hydration needs of Indians in the form of immediately-available hygienic and safe drink source,” Indian Beverage Association (IBA) said in a statement.

The association, which has major cola and other beverages makers such as Coca-Cola India, PepsiCo India and Red Bull India among others as members, said aerated drinks are also not ‘sin’ goods “as the Union Government itself had accepted the position by removing such goods from Schedule VII of the Finance Act, 2005 in the 2015-16 Budget”.

On the health issues linked to such drinks, IBA said: “There are observations by the court on the basis of the report of an expert panel that the ingredients present in aerated drinks do not pose any health hazard.” Last week, GST Council had announced that luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, will be taxed at the highest rate of 28 per cent and would also attract a cess in a way that the total incidence of tax remains at almost the current level.

Expressing disappointment at the decision, IBA said: “At Rs 10 for 200 ml, aerated drinks are neither luxury goods nor do they carry the kind of health hazards attributed to them.” It further said the consumer base of aerated drinks ranges from the low to high income group and they are supplied even to rural villages and semi-urban places.

When the applicable tax rates on aerated drinks with abatement already stands at an effective 30-31 per cent, the IBA does not subscribe to the recommendation of an additional cess on aerated drinks over and above the 28 per cent GST rate, it added.

Stating that food processing and aerated beverages have been one of the largest contributors to the FDI in the country, IBA hoped that it will not be “discriminated against in GST”.

While increase in taxes will lead to an increase in the price of the soft drinks, the viability of the industry could be in grave danger due to a consistent adversarial tax approach, IBA added. Source – [07-11-2016]

How to make GST fair and simple

November 7, 2016

Conflicting demands of different stakeholders make tax reform the art of the impossible. While the gainers are silent, the vociferous cacophony of the opponents drowns the voice asking for bold and imaginative reform. It therefore comes as no surprise that the Union finance minister has had to abandon most essential features of the transformational goods and services tax (GST) reform. Bound by the constraint of his 30 colleagues in the GST Council wedded to the legacy system, he is forced to follow the path of mediocrity.

The unanimous passage of the Constitution Bill in Parliament had revived the hopes that Prime Minister Narendra Modi could well make impossible possible and deliver a GST that met the triple objectives of fairness, simplicity, and economic growth. However, the proposals of the GST Council meet none of these objectives.

The positive impact of GST on economic growth will be a result of the removal of cascading of taxes, i.e., noncreditable taxes on investment and production inputs. No credits are allowed for input taxes where the sectors are exempt from tax. The blocked credits add to the cost of investment, and hinder economic growth.

Following the methodology adopted by the GST Council for revenue and inflation impact analysis, we estimate the quantum of cascading taxes to be Rs 3.2 lakh crore (or 36 per cent of the Rs 8.8 lakh crore of revenues in 2015-16 to be subsumed under GST) under the current system.

With 50 per cent of the consumption basket remaining exempt from tax under the GST Council proposal, cascading taxes will go up (not down) marginally, to 39 per cent of total revenues. As a result, the positive impact on GDP would be negligible, less than 0.5 per cent.

The objective of simplicity will also remain a mirage if the multi-rate structure and the model GST law are adopted. If anything, complexity may go up during the transition. The model law requirement of state-wise registration will multiply the compliance burden for pan-India service providers by a factor of 30. Despite extensive representations by the industry, the states have refused to adopt a single centralised registration system.

The multi-rate structure will compound the complexity. The impact would be the worst on the SMEs who are illequipped to manage classification of goods in multiple baskets. Kirana store dealer will have goods in all five baskets (exempt, five per cent, 12 per cent, 18 per cent, and 28 per cent). The tax rates will differ for similar products. Bread may be exempt, but other bakery products taxable at a merit rate. What will be the fate of chocolates, biscuits, and fruit bars? The same products bought at a restaurant or fast-food outlet may attract tax at the 18 per cent rate for services. Consumer durables will attract 28 per cent tax when bought, but only 18 per cent when rented as a service.

Taxation of mobile phones has already been a matter of controversy. Should they be taxed as telecommunication equipment, cameras, or computers? Fairness is the principal reason for the adoption of the multi-rate structure. Finance Minister Arun Jaitley defends the four-tiered structure by stating that air conditioners and chappals cannot be taxed at the same rate. True, but those with air conditioners also buy chappals .

The benefit to them of a lower rate would, in fact, be substantially more simply because they spend more on them.

The ultimate test of fairness is not the tax rates applicable to individual products, but the overall distribution of the tax burden across lower to upper echelons of society. Surprisingly, the four-tiered structure approved by the GST Council results in a higher tax burden on the bottom 30 per cent of the consumers. EY estimates show that the bottom 30 per cent of consumers accounts for 12 per cent of total consumption spending, but contribute 12.6 per cent to the total taxes on final consumption. Under the fourtiered GST rate structure, their contribution to total taxes goes up to 12.7 per cent.

Viewed from this perspective, the new rate structure worsens the fairness of tax.

This result is not unique to GST reforms in India, but common in most jurisdictions with multi-rate structures. Lower rates for basic necessities do not improve the fairness of tax, and often worsen it. The rich benefit from the lower rates more than the poor simply because they spend more (on items in all rate categories) than the poor.

So, what can be done? The only option to improve the fairness of GST is to replace exemptions and lower rates by a targeted income support program for lower-income consumers. As suggested by Kelkar, Poddar and Bhaskar (in ‘GST: make haste slowly, Mint ,October 19, 2016), this could be in the form of a direct benefit transfer (DBT) of, say, Rs 2,000 per head per annum for the bottom 27 crore (bottom two deciles of the population). This program would have a cost of Rs54,000, which would be a fraction of the cost of exemptions in the GST Council formulation. The GST could then be levied at a single rate of 12 per cent on a broad base, with a supplementary cess on selected demerit and luxury goods.

The contribution of the bottom 30 per cent to GST revenues would then fall to 5.4 per cent, from 12.7 per cent under the multirate structure.

The single rate will be pro-poor, bring in simplicity, and spur investment and economic growth.

The GST Council must face up to this reality and decide. It can either sacrifice simplicity and economic growth for all at the altar of keeping a few happy, or take the bold step of adopting an alternative that gives all the three advantages of simplicity, fairness and economic growth.  –[07-11-2016]  

Published by Business So Simple

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