For the uninitiated, GST is an acronym for Goods and Services Tax. It is a tax reform introduced in July 2017. It is an indirect tax that applies to the entirety of India, replacing several cascading taxes imposed by India’s central and state governments. Introduced as The Constitution (One Hundred and First Amendment) Act of 2017, GST provides a simpler way for taxing goods and services.
With GST implemented, goods and services throughout India are taxed at a homogeneous scheme using the following rates: 0%, 5%, 12%, 18%, and 28%. There are special rates, though, imposed on specific products: 3% for gold and 0.25% for rough precious and semi-precious stones. Additionally, a cess of 22% on top of the 0% to 28% rate is levied on certain products such as tobacco, luxury cars, and carbonated drinks.
So how does this tax reform affect the Indian economy? What is the reaction of the Indian business community? Featured below is a sampling of GST’s effects. Examine what they contribute to the tax reform’s overall economic impact. Is GST good or bad for India?
When it comes to consumer goods and services, the main concerns are food and the services sector. For these, the GST brings good and not so good news. The good news is that food products are charged 0%. The not so good news is that services in general are seeing an increase of 18% from 15%.
On the other hand, the implementation of GST increases the tax on footwear and garments priced at INR 500 from the previous 14.41% to 18% but those priced lower than INR 500 are taxed lower at 5%. For ready-made garments, the rates are lowered to 12% from 18.16%. Mobile services rates are slightly increased, though, because of the new 18% rate, from 15% before. When it comes to direct-to-home and cable services, the new fixed rate of 18% can be considered a general reduction as compared to the previous 10%-30% range and the additional service tax of 15%.
Under GST, cab and taxi rides are taxed lower, from 6% to 5%. For those who who travel by air, GST is favorable as the tax rate is lowered to 5% for the economy class and 12% for business class. Train fare, meanwhile, is mostly unaffected as the change is minimal, from 4.5% to 5%. Those who travel by sleeper are not affected by the tax rate change but those who travel first class are charged more.
Amusement park rates increase with GST taking effect as the previous tax rate of 15% has been raised to 28%. Movie tickets are similarly increasing as they are categorized under the 28% rate. For hotels, no GST are to be charged for room rates priced lower than INR 1,000. However, room rates higher than INR 5,000 get a 28% tax rate. For 5-star hotel restaurants, the rate is 18% for those that serve alcohol and 12% for those that don’t. Smaller hotels and restaurants are only charged 5% if their annual turnover does not exceed INR 50 Lakh.
GST reduces under-construction property costs as the tax rate is set at 18% but this can still be lowered to an effective rate of 12% as the property builder can avail of input tax credits. On the other hand, buying a car (most models) in India can become slightly less expensive as the tax rate is fixed at 28% with an additional cess of either 1%, 3%, or 15% depending on which segment the car being purchased belongs. In contrast, investing in jewelry can become slightly more expensive because of the 3% (from 2% in most states of India) rate on gold and the 5% charged on the crafting of the jewelry.
Indians who buy insurance policies, unfortunately, are seeing increases in their premiums with the implementation of GST as the tax rates have been raised for general, health, and life insurance. On the other hand, the tax rate change on mutual fund returns under GST is mostly minimal. This is because the GST is charged on the mutual fund’s Total Expense Ratio (TER). The rate is only 3% so the effect is going to be marginal.
Since they belong to the service industry, banking services and the services provided by other financial service companies are subject to the 18% rate, which is higher than the previous 15%. Debit cards, fund transfers, ATM withdrawals, cheque book or draft issuance, bills collections, charges on cash handling, and more are affected. Even money sending services are affected. Companies that provide money transfer services, nevertheless, are expected to try to be competitive so it’s worth observing how they change their rates. It’s advisable to observe these changes on sites like Moneytransfercomparison.com to find out which ones are trying to be competitive and which ones are taking advantage of GST to justify higher than expected rate increases.
The GST regime is believed to be good for the Indian startup sector as it carries with it tax credit on purchases, a simple compliance model, increased limits for registration, and the ability to promote the free flow of goods and services. It takes away the complication and confusion of the previous VAT laws, especially for those in the ecommerce industry. GST may stir inflation but there’s the optimistic view that the undesirable effects will not last long, and will eventually be offset by the positive impact of an improving economy.
Given the sampling of effects mentioned earlier, it can be said that GST is mostly viewed as an inflationary measure. However, the Indian government believes otherwise. Hasmukh Adhia, Revenue Secretary, says that consumer price inflation with GST implemented will go down by 2% by the end of 2017. Naturally, not many are convinced by this claim. The fact that the tax rate on services has been raised to 18% from around 15% is already expected to raise inflation above levels experienced before the institution of GST.
MS Mani, a senior director of Deloitte, in an interview with Forbes India, said that the inflationary effect of GST will be temporary or short-term. This is because, according to Mani, the rates have been kept close to the existing excise duty and state tax rates. For Mani, the exemption (0% rate) of consumer products for the masses and the higher (28%) taxes on those consumed by the rich will keep inflation in check. This is expected to improve the flow of input credit with GST in place.
It’s difficult and too early to evaluate whether or not GST has positively affected economic activity. The Indian government, however, believes that they are on the right track with GST. At least one Indian business executive shares this optimistic view of GST. In a report by The Indian Express, ICICI Bank CEO Chanda Kochhar was quoted to have said that GST is a transformational structural reform which has multiple benefits. These benefits include the establishment of a national market, improved ease of doing business in India, better productivity and efficiency, and improved compliance among taxpayers.
The GST reform package is ambitious and is undoubtedly a major move for the $2 Trillion Indian economy. Its main selling point for the Indian economy is its supposed advantage of making it easier for businesses to do business. It provides a simplified taxation scheme for goods and services, something businessmen will appreciate. It’s far from perfect, though, and it’s definitely worth paying attention to non-political criticisms, especially in relation to how it affects poorer Indians.
GST’s impact on the Indian economy can go either way: good or not so good. Fortunately, there aren’t that many analysts who express damningly averse views on the matter. With honest and efficient administration, GST may be a good move for the world’s third largest economy.
Do you think CBDT should extend Tax Audit Report and relevant ITR Due Date? Please Comment, Vote, Retweet and Like.— Tax Guru (@taxguru_in) September 18, 2018