IMPACT OF GST ON MANUFACTURING SECTOR IN INDIA
Submitted as a part of the course on Business Government and Society
Under the Guidance of
Professor Ms. Rajalaxmi Kamath
Section-C Group-11
Deep Zanzrukia 1611218 Shreya Mukherjee 1611219 Vivek Singh 1611217 Abhishek Ghosh 1611151 Kshitij Agarwal 1611152
Contents 1.
Introduction ......................................................................................................................................... 1
2.
Current Tax Structure ........................................................................................................................... 1 2.1.
Direct Taxes .................................................................................................................................. 1
2.2.
Indirect Taxes ............................................................................................................................... 1
2.3.
Characteristics of Indirect Tax Structure ...................................................................................... 1
2.4.
Advantages of Indirect Taxes ....................................................................................................... 1
3.
Issues with Current Tax Structure ........................................................................................................ 2 3.1.
Multiplicity of Taxes and Duties ................................................................................................... 2
3.2.
Lack of Uniformity of Provisions in State VAT .............................................................................. 2
3.3.
Distinction between Goods and Services ..................................................................................... 2
3.4.
Barring States to levy Tax on Services .......................................................................................... 2
3.5.
Distortion of Taxes due to Exemptions ........................................................................................ 2
3.6.
Cascading Effect of Taxes ............................................................................................................. 2
3.7.
Complexities in Tax Administration .............................................................................................. 2
4.
Manufacturing Sector ........................................................................................................................... 3
5.
Goods and Services Tax (GST) .............................................................................................................. 3
6.
Key Features of GST .............................................................................................................................. 3 6.1.
Dual GST ....................................................................................................................................... 3
6.2.
GST on all Transactions ................................................................................................................ 3
6.3.
Consumption or Destination based Tax ....................................................................................... 4
6.4.
Input Tax Credit ............................................................................................................................ 4
6.5.
Administration of GST .................................................................................................................. 4
7.
Impact on Business Side ....................................................................................................................... 4
8.
Impact on Government Side ................................................................................................................ 6 8.1.
GST: The Journey So Far ............................................................................................................... 6
8.2.
GST: Challenges Ahead ................................................................................................................. 6
9.
The Consumer Perspective: Effects of GST on the society ................................................................... 7
10.
Conclusion ........................................................................................................................................ 8
11.
References ...................................................................................................................................... 13
1. Introduction Touted as India’s biggest (indirect) tax reform, the goods and services tax (GST) bill was passed by Lok Sabha (Lower House) on August 8, 2016 and was incorporated into the Indian Constitution by 101st Constitution Amendment Act on September 8, 2016.1 The current indirect tax regime in India consists of multiple taxes levied by center as well as state government (Annexure-1). The share of indirect taxes stands at 44.4% of total tax collection in India. In 2015-16 the indirect tax collection was estimated to be Rs. 6.39 lakh crore (Annexure-2). The current indirect tax system is plagued with problems of multiplicity of taxes, complex structure, cascading effect of taxes and tax arbitrage. GST is seen as a solution to this taxation system. In order to evaluate the GST, one first needs to understand the existing tax structure and its impact on the relevant sector.
2. Current Tax Structure The current tax regime consists of two types of taxes – Direct taxes and Indirect taxes2.
2.1.
Direct Taxes
These are imposed on income, wealth or expenditure of a person or a corporation. The burden is directly felt by the entity paying taxes. Example – Income tax, Corporate tax.
2.2.
Indirect Taxes
These are imposed on goods and services. The tax is paid by the manufacturer or the service provider but its burden is transferred to the consumers of such goods and services. Some transfer it directly by charging taxes in addition to price of goods/services while others transfer it in the form of higher price of such goods/services. Example – Service Tax, Excise Duty, Value Added Tax (VAT), Customs Duty, Central Sales Tax (CST)
2.3.
Characteristics of Indirect Tax Structure
In Indirect taxes the incidence and impact falls on different persons. Which means it is charged to one person but its effect is felt by another person. It is regressive in nature. So, more impact is borne by the lower income group. Manufacture, purchase or sale of goods or services is considered as a taxable event for indirect taxes.
2.4.
Advantages of Indirect Taxes
Indirect taxes are included in the price of goods and services. So, consumers don’t feel the burden of paying taxes and hence there is no resistance in paying taxes. Indirect taxes are easily collected as it is relatively easy to keep record of goods and services in an organized sector. Manufacturing activities take place mostly in organized sector where records are maintained. So, manufacturing sector becomes a key sector for collection of indirect taxes. Also, indirect taxes can be strategically used to support development in target areas. This paves way for indirect tax reforms in line with other developmental projects by Government of India (GOI).
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3. Issues with Current Tax Structure The current tax structure is indebted with a lot of taxation difficulties and issues. Some of them are discussed as3:
3.1.
Multiplicity of Taxes and Duties
There is multiplicity of taxes under current tax structure with taxes levied by central government, state government and local bodies. Central government levies Excise Duty on produced goods, Service Tax on services and Customs Duty on exports and imports of goods. State government levies taxes like VAT, Purchase Tax, Octroi, Entry Tax and Duties on liquor. Additional taxes levied includes Cess, Road Tax, Entertainment Tax, Stamp Duty and Luxury Tax. Such multiplicity of taxes leads to complex tax structure, tax burden, additional paperwork and thus also leads tax evasion.
3.2.
Lack of Uniformity of Provisions in State VAT
There is lack of uniformity in VAT structure across different states. Differences arise due to different categorization of goods, threshold limits, exemptions and taxing procedures. Such complexities increase in cases of goods transferred between two states.
3.3.
Distinction between Goods and Services
In case of intangible goods like software services, broadcasting and composite contracts in which goods are provided along with services, complexities arise as different states and central government categorize them into different groups leading to different taxes on similar types of goods and services.
3.4.
Barring States to levy Tax on Services
State governments are barred from levying taxes on services. This arrangement poses difficulties in composite contracts involving sale of goods coupled with services.
3.5.
Distortion of Taxes due to Exemptions
This issue is relevant to CENVAT which has area and sector specific conditional or non-conditional exemptions. Such exemptions give rise to complexity arising among goods transferred between states with different rules for such exemptions.
3.6.
Cascading Effect of Taxes
Current taxation system leads to cascading of multiple taxes on both state and central taxes. Tax are levied on goods and while subsequent taxes are levied on the same goods, it does not discount the taxes paid earlier. Such tax structure results in cascading of taxes due to which the final price of goods become much higher than it should be otherwise.
3.7.
Complexities in Tax Administration
Despite improvements made in current tax structure, the administration of taxes is still highly complex at both state and central levels. Dispute resolution, reimbursement of taxes is still a complex and expensive affair leading to delayed tax collection, tax evasion and continuously increasing price of goods.
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4. Manufacturing Sector Historically, India is being seen as an agrarian country. However, the gap in GDP contribution from agriculture sector and non-agricultural sectors have been continuously increasing. The manufacturing sector has emerged as one of the high growth sectors in India. Programs like ‘Make in India’ are launched to make India a global manufacturing hub. The Government of India has set an ambitious target of increasing the contribution from manufacturing sector to 25% of Gross Domestic Product (GDP) by 2025, from current 16%.4 Manufacturing sector deals with production of goods and services, so it comes under the indirect tax regime. A change in indirect tax regime, therefore, impacts the whole sector. However, the sector is marked with concerns ranging from declining exports and labor issues to lack of infrastructure. In addition to this, it is burdened with compliance of complex indirect taxation system. Multiple legislations have resulted into burgeoning compliance and administrative costs, valuation disputes and increasing difficulty of doing business. As per The World Bank, India ranks at 130 in terms of ease of doing business.5 This calls for a change in the current indirect tax structure which can do away with the complexity of the existing tax structure and give a strategic boost to the sector. Deemed as a solution to this, Goods and Services Tax (GST) has been proposed as one tax for one nation and is being looked upon to have a beneficial impact on several sectors including manufacturing sector.
5. Goods and Services Tax (GST) The Goods and Services Tax (GST) is a comprehensive Value Added Tax (VAT) levied on goods and services. Its main purpose is to replace all the multiple taxes levied under the current tax structure by a single nation-wide tax. GST will be collected on the value added at each stage on purchase or sale of goods and services based on input tax credit method but without any state boundaries6. GST will be levied at every stage of distribution chain. While current taxes are production based taxes, GST is a consumption based tax. As GST, will cover most of the goods and services, it will be levied in four slabs – 5%, 12%, 18% and 26%. About 80 items are to be exempted from GST. These includes food items, petroleum products and alcohol.
6. Key Features of GST GST in current state is widely different from current tax structure. Few of the key features of GST are listed as:
6.1.
Dual GST
Government of India has proposed a Dual GST regime. GST will have two components: Central GST (CGST) to be levied by Central Government and State GST (SGST) to be levied by State Government. However, the basic regulations governing the tax like chargeability, classification of goods, definition of taxable event etc. would be uniform across all statutes.
6.2.
GST on all Transactions
GST will be applicable on all transaction of goods and services except for exempted goods and services. The CGST and SGST will be levied on all transactions of goods and services made up to the final consumption by the consumer. In such format, transfer of goods from one warehouse to other warehouse would also be taxable under GST Law. Thus, this will cause major supply chain changes of manufacturing firms. This is further discussed later. Page | 3
6.3.
Consumption or Destination based Tax
GST will be charged on the basis of consumption or destination as opposed to the traditional taxes which are production based. Thus, revenues from GST will flow to the state where consumption takes place and not the producing state. Such a system leads to disincentives for states where production has already been setup. In order to compensate the producer states, GOI has allowed state governments to levy 1% production tax in addition to SGST.
6.4.
Input Tax Credit
Liabilities of SGST and CGST will be calculated on the basis of input credit method. This means, the credit will be available for tax paid on all immediate purchases of goods and services on the basis of suppliers’ invoice. In manufacturing sector, a good pass through multiple stages before being converted into the final product. Under current tax regime, this results into cascading effect wherein a good is taxed on its final value which already has a portion of tax in it and not on the value added at each stage. Thus, leading to overall increase in price of the final product.
6.5.
Administration of GST
The administration of GST is distributed as per SGST and CGST – States will administer SGST while Central Government will administer CGST. Respective governments will have the jurisdiction over the entire value chain and on all the taxpaying entities on the basis of described thresholds. However, there is no clear guidelines on how the existing tax departments will be modified to replace traditional taxes by GST.
7. Impact on Business Side One of the largest tax reforms, India has seen, is on the verge of being implemented and will impact businesses whether big or small. In order to understand what this means, we spoke to Mr. Akshat Agarwal, director of an export oriented textile unit & Mr. Umesh Joshi, Head of replenishment at Britannia to understand what this reform would mean for the manufacturing sector and how it would impact their businesses. The industry as a whole is very enthusiastic about the implementation of the GST as it will finally end the cascading effect of taxes which has plagued the country for generations. Also, cross credits settlements between the state government and the central government is one of the celebrated moves of the GST which was not possible in the current regime. What this also means is that it would result in lowering of overall costs for the manufacturers which coupled with application of tax on the cost at factory rather than on MRP will further help the manufacturers lower prices. But all this depends on which slab the goods will fall under. The manufacturing sector is still not clear under which slab their goods will fall and with just three months for the implementations it has the left these manufacturers worried. On discussion with Mr. Umesh Joshi we learnt that reworking the pricing cannot be done overnight and usually takes about three to four months especially in case of fast moving consumer goods as the product quantity is usually adjusted to keep the product at a certain price level and hence entails manufacturing setup and packaging changes. For Mr. Agarwal, the lead time for his product ranges between three to six months and the laid-back attitude of the government has him worried as he is unable to give his international clients the price of the product. There is no clarity from the governments end as to what will happen to the current duty drawback schemes once the GST is implemented which is very important in order to determine the pricing of the product in a highly competitive business. Page | 4
With respect to the supply chain changes, we stand to understand that the manufacturers operating from one single state have nothing to worry about. Manufacturers operating from multiple states will now need to pay tax even on stock transfers. Though this GST paid would be made available as credit, but this would entail locking of the working capital till these goods are sold further down the supply chain. Apart from this the manufacturing sector have set up their warehouses based on the tax incentives they get in a state. Now decisions may need to be made on economic efficiency point of view. Mr. Umesh Joshi explained to us that for products such as food items it would make more sense to have multiple warehouses and manufacturing setups in various states as it reduces their distance from the end consumer and hence their costs. This would be true for any low value product. But for high value products it would make more sense now to use economies of scale and operate from one roof in one state. The key hindrance between state transfer is the 1% IGST which the bill dictates. This 1% additional tax may hinder the second option and make it feasible for some manufacturers to set up their manufacturing units closer to the point of consumption. One of the key changes that would be required is the change of the ERP systems to make it compliant with the GST. This would entail both manpower and monetary costs for the manufacturers. Also, there is not much clarity on when these updated modules would be available so that the manufacturers can train their staff much ahead of the implementation in order to ensure a smooth transition. A key point of the bill is that, the credit to the manufacturer will be transferred only when the vendor has sold the goods to files the tax return and both their invoices match. By doing this the manufacturers will need to choose trustworthy vendors otherwise it would result in blocking of working capital for the manufacturer. Also, these vendors will need to setup their own GST network in order for the system to work smoothly. In terms of already existing long term contracts, the manufacturers will need to renegotiate them in terms of price, advance, taxes etc. to make them GST complaint which again adds to the many challenges that the manufacturing sector will face for this implementation. For example, the recipient of an advance needs to ensure that the sender pays the GST on the advance otherwise the recipient shall be liable for it. On the question of future capital investments, the thoughts they shared with us were very much in sync. Up until now, the states had attracted investment solely based on the tax incentives they were able to devise (sometimes even overnight) but now they will need to do some ground work in terms of infrastructure development to attract future investments. Thus, this puts all the states on the same level playing field in terms of attracting future investments. For the investment that has already been made based on the tax incentives that were offered, once the GST is implemented, such incentives would not be possible as there will be a shift to consumption tax and hence tax would be collected in the state of consumption and hence the manufacturer will not be able to claim refund under the tax incentive they were offered. The manufacturing sector will need to rework their return on investments based on these changes and at the same time may need to negotiate some type of deal with the government as there has been no clarification in this regard form the government.
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8. Impact on Government Side The government is all set to roll out the GST in the upcoming months. While the activity is focused mainly on improving different aspects of business side, government functioning and implementation with regard to taxation is likely is to be affected as well. Also, there are many challenges that the government needs to tackle in order to have successful implementation of India’s largest tax reform till date. To understand the impact on government side, we had an interaction and follow up discussion with Mr. K Balamurugan, Indian Revenue Service, Customs & Central Excise. He provided a candid view of GST, its origins, implementation, and challenges. We also discussed about the impacts on the manufacturing sector.
8.1. GST: The Journey So Far GST is the much-needed fiscal reform needed in the country. Many opponents of GST give the argument that it is a regressive tax, effecting the poor as well as the rich. However, studies have shown that indirect taxes could be the best way to bring tax equality. The split of tax revenue in India is 5050 between direct and indirect taxes. The long-term aim is to push this more towards the realm of indirect taxes. This step promises to increase the governments tax revenue. The foundation of GST was laid down in 2007 by Mr. Chidambaram. The initiative had a twofold story the DTC (Direct Taxes Code) & GST (Goods and Services Tax). While the former has died a political death, the latter promises to shine presently. There is a plethora of indirect taxes in India such as VAT, customs, central excise, service tax and many more. GST envisions to unify them under one umbrella. It will be a value-added tax, at every point of value addition. The concept is not new to the world. It dates back to 1950’s. In the 1960’s the success of VAT was evangelized by IMF and lead to widespread adoption. Over 150 countries have adopted indirect taxes in one form or the other. There is however a dark side to this story. In every country where GST was introduced, the immediate impact was a dip in growth and political instability. Almost every party which bought out these changes in their respective country, lost power soon after. Thus, it is a great challenge for the central government to make this shift. This problem is further aggravated by the conflict in interests of different state governments. Take for example Karnataka, a state which has invested heavily into developing manufacturing capabilities and receives tax revenues on business originating from its state. As per GST, all the tax in for of production tax and cross border transport is gone and the state in which the product is sold will be collecting the net taxes. The major debate on reaching a consensus on this bill is thus the revenue sharing between different states and center. It has been stipulated that the center will compensate the state for lost revenue over a period of 5 years to bring them on board.
8.2.
GST: Challenges Ahead
Indian constitution 101st amendment act paved the way for implementation of GST under the GST council. It also brings with it a mandated deadline of September 2017 when states will stop receiving tax revenues if they are not through GST. This fact has led to different states and political parties resolving their issues on revenue sharing in the past few months at a fast pace.
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The biggest challenge to GST implementation is Invoice matching. As and when a good moves through the supply chain from manufacturer -> warehouse -> wholesaler -> retailer -> end customer; the invoice number will move with the good and will be tracked at each point of value addition. At every point of transaction, the invoices will be matched to enable tax credit transfers which will make evasion difficult. To perform this humongous task, it calls for a solid IT infrastructure. Introducing GSTN (Goods and Services Tax Network), a 49-51 split organization between Infosys and GOI. Currently, about 60% of the project is complete and work is going on at a fast pace. GSTN network will check and make sure that only after the taxes are paid on a good, that the corresponding tax credits will be passed on to the manufacturer. GST will ensure greater tax discipline among traders and India’s tax to GDP is bound to increase because of this. However, for a section of retailers who were avoiding taxes, this would come as a huge blow and may cause public unrest. It is believed that the GST fiscal reform would take a 10-year stabilization period and would see an initial dip in growth. The burnt will be the highest in the year 2019 and thus, GST has also now become a political bet. Leading account keeping software vendor, Tally has come up with GST match facility on its systems. In a broad sense, the accounting and tax filing practice will become easier and give a boost to MSMEs by reducing middlemen and improving transparency via automatic returns facilitated by GSTN. In a city like Bangalore where 30 thousand businesses are registered but only 6 thousand filing their taxes, GST brings a promise of widening the tax net and could potentially lead to lower tax rates in the future. All the data regarding businesses will be stored on the cloud and brings with it data security issues. It is important to note that many sectors are free from the ambit of GST and it is not so uniform as it was promised to be. Road taxes, real estate stamp duty, liquor taxes and taxes on petroleum products will continue to persist on their own. With the amendment act hanging with the deadline of September 2017 and the recent fiasco of demonetization effecting the economy; it has indeed become a tricky way ahead for GST. This shift will force firms to change their strategy in terms of distribution. New business agreements will be framed among various parties of the supply chain taking into consideration the implications of GST. The whole exercise was championed by the multi-national companies who wanted simpler tax reforms. Will the investments now rise as we move ahead with GST? Will the supply chain get smarter and integrated and be fueled by credit growth? Will the honest retailers who pays his taxes on time be incentivized by the manufacturers? Only time will tell.
9. The Consumer Perspective: Effects of GST on the society Apart from business advancement and ease of doing business, end consumers of the manufactured goods will also be impacted in ways which are speculative as of now. There is a general expectation among consumers with the cascading effect of tax gone with GST, prices will see a downward trend. The GST is constructed in such a way that it will lead to substantial benefits and savings in costs that would accrue to the end consumer. However, that may not be the case for all goods. The estimated GST on all commodities is expected to be in the range of 17% to 19%. For the purchase of most goods there are two components of taxes levied to the end consumer: • Standard Excise Duty: 12.5% • VAT: 12.5% to 15% depending on the State tax laws Page | 7
Thus, the effective tax rate of goods is about 25% to 28% due to cascading effect of taxes as discussed earlier. The final prices of goods will thus be cheaper under GST rate. FMCG products, automobiles and other goods will see a decrease in final prices. However, for goods like textiles, edible oil, low value footwear, the tax rates in the current system is different. • Standard excise duty: 0% • VAT: 5% (in most States) • Non-creditable taxes: 3% to 4% The effective tax rate is about 8 to 9%. The current GST rate of 18% would mean almost a doubling effect on current prices of these goods. Even if a slab of 12% is applied, it will lead to a considerable hike in prices. Services would see a price hike in general due to increase in taxes. In spite of the savings on costs for businesses, it is up to them to pass on the benefits to the end consumers and hence it needs to be ensured by the government that the benefits are indeed transferred to the consumer. The government has introduced the ‘anti-profiteering’ clause in the GST bill to ensure this. In the long run, improvements in supply chain efficiencies will reduce the production cost for the firms which in turn will give a headroom for reduction of prices The introduction of GST will also make tax systems more transparent for the consumers. Earlier there would be a lot of Cess and taxes applied. That confused the consumer. Now, they will be able to clearly see the amount they are paying as tax without any ambiguity.
10. Conclusion Analysis of the impacts of GST implementation on manufacturing sector in India reveals many sides of the story. It is undoubtedly the biggest tax reform the country has seen in decades and time is also apt for the same with the government making its push to develop India as the manufacturing hub for the global market. On business side, the tax structure would be simplified, removal of cascading effect on tax would drive down costs for manufacturers, state governments would come up with better proposals and infrastructure facilities for attracting industries, supply chain can be better planned for optimal efficiency. But in the wake of not so clear regulations about tax slabs, businesses are in midst of confusion and unprepared to tackle the changes brought on by the policy changes as well as face other challenges of employing trusted vendors, locking up of working capital etc. On the government side, the government will need to make immense efforts for smooth transition to GST. This will involve setting up the huge infrastructure, overhauling of taxation practices, stabilizing the loss of revenue for state governments, defining clear cut tax slabs for goods and services. The state governments would now need shift their focus from tax revenues to creation of jobs, infrastructure developments etc. and come up with better plans to attract industries for all round development and enhance the ease of doing business. Consumers of the manufactured goods can expect a decline on prices of many goods they consume as well as increase in some of the products. The effect of cost savings due to taxation changes and optimized supply chain will mostly be passed on to the end consumers and they’ll be more aware of what taxes they are paying.
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But again, much of this is speculative in nature because of the uncertainties involved and the fact that the changes are yet to be implemented and the full extent of the impact on the three pillar stones of the country’s economy viz Business, Government and Society can only be realized once GST has been implemented and its effect studied. On whole, GST is all set to roll out in coming July and the extent to which it serves it purpose would largely depend on how well the system is adopted and implemented across the country. If failed, it could lead the economy in a state of sluggish growth but if successful, the structural change would help in many aspects of business, government tax revenue collection, the consumer side and hopefully make Indian ecosystem more conducive for business and raise India’s ranking on the list of ‘ease of doing business’ across the globe.
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Annexure-1
Source:https://en.wikipedia.org/wiki/Goods_and_Services_Tax_(India)#Current_Indirect_Tax_Regim e_in_India VAT/Sales Tax
Central Excise Duty
Surcharges & Cesses
Additional duties of Excise
Surcharge & Cesses
Central Taxes
Additional Duties of Customs CVD & SAD
State Taxes
Purchase Tax
Excise Duty Medicinal and Toiletries
Service Tax
Entertainment Tax
Central Sales Tax
Taxes on Lottery/Gamblin g
Entry Tax
Luxury Tax
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Annexure-2
Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=136519
Annexure -3 Discussion on Indian taxation system with Mr. Sibichen K Mathew (IRS), Income Tax Department The following discussion is largely based on the talk and follow up discussion with Mr. Sibichen K Mathew [http://www.sibichen.in/]. He is an Indian Revenue Service (IRS) cadre and working in the Income Tax Department. He is of the belief that the country should abolish all kinds of taxes one day, especially GST which is a regressive tax (i.e. everyone in the population would come under its ambit). Taxes in India: Case in Point Taxes originated in the medieval ages with the advent of wars between tribes and nations. To continue their massive war campaigns, every nation used this instrument. Even in India, the origin of tax comes about from the colonial rule and the tradition has continued till date. Historically, it is easy to see why taxes are looked down by the people of the nation as something which is unjust, unfair, and biased. There are multiple factors as to why we dislike taxes so much. During the British rule, it was a tool of repression. It has been politically and sociologically moulded in the following years leading to its present state. While in the European nations, taxes have a certain degree of social reciprocity meaning the taxpayer can see the benefit coming back to him. The situation in India is completely different with the general notion on tax being a welfare scheme for the less able. Once you cough out the money, just forget about it. The limited accountability of the government in terms of its expenditure of taxpayer’s money further aggravates this problem. Once you keep this existing notion in mind and look at tax regulations, it all boils down to simple application of game theory. The penalties are so lax and the chances of getting caught dramatically low, why should one pay taxes. Let’s just follow the norm and evade like a pro. Page | 11
Income Tax Collection: Now and next The effective tax base of India is pathetically low. The government’s aim to increase tax revenues and is looking at innovations in the taxing process to achieve its aim. Tax payment, in the language of the IT dept., can be treated as a national good. Like any other good, it follows a supply demand curve. Further introspection shows that the tax revenue should follow the Laffer’s curve. The objective is to reach this peak, where tax rates are lower than current but the tax base has widened. IRS has limited resources and must be selective in perusing cases of tax evasion. An implication of the situation is the plethora of amnesty schemes announced every other year. Here in lies the challenge and a prospective solution in the form of digital payments. The current regulations which stops cash payments above 3 lakhs give a great boost in this direction. This allows the IT Dept. to create a 360-degree profile of every PAN card holder and use non-intrusive and non-invasive methods to keep defaulters at check. A special mention of the PMO office to push these reforms through. To illustrate the importance of this step, take the net yearly seizures by the IT dept., a miserly figure of 3000. The limited manpower calls for innovative steps to solve this problem. Digitization not only increases transparency, it also brings down the cost of tax collection. Gone are the days of making rounds of IT office, now you can e-file your returns from the convenience of your home or office. This has an added benefit of bringing down corruption by removing the middlemen from the process. The nation is ready for a leapfrog in the prevailing tax culture. To further strengthen this move, a low rate of tax (say 5%) should also be applied to agricultural income and religious institutions. This would promote transparency and plug the leaks in the tax net which occur via these activities, i.e. the practice of fund transfers into these instruments to evade taxes.
Annexure -4 Discussion with Mr. Akshat Agarwal, director of an export oriented textile unit Q. What are your first impressions regarding the impact GST will have on the manufacturing sector? Ans: Based on the buzz that is going on regarding the GST bill, a quick overview shows that implementation of GST should improve the performance as well as the competitiveness of India’s manufacturing sector. Q. Do you expect any changes in your supply chain? Ans: For us there will not be much changes in our supply chain as we operate from a single state. For other manufacturers who have their manufacturing and their warehouses in different state based on the incentives they had sought while building these units, supply chain changes may be necessitated. The GST being a destination based tax, in order to handle stock transfers, ‘First Stage Dealer’ registrations will be required for out of state transfers. This will result in a locking up of working capital as GST Page | 12
would be required to be paid on this transfer, the refund for which will be processed once the goods are transferred again to the end customer. This locking up of working capital may force some companies to have their stocking units closer to their manufacturing setups and have smaller storing units in the various states. Q. Will there be a change in the tax structure for you? Ans: Yes, there will be a change in the way the goods are taxed for us. Currently, the excise duty is payable as soon as the goods are billed and are cleared for movement from the factory gate. Whereas, GST being a destination based tax, the tax will take place based on the time of supply i.e. the earliest date of issuance of bill, payment received, goods transferred in the books of receiver and the date of removal of goods. Q. One of the biggest positives about the bill? Ans: Implementation of GST will resolve the double taxation issue which takes place because of the different state and central taxes and the non-transfer of credits between them. /this would result in overall lower taxes on the final price of goods and hence should result in lowering of prices for some items as the final outcome will depend on which tax slab the goods may fall under. Q. One of the biggest negatives? Ans: The process of input credit for the initial taxpayer will depend on the matching of records of returns as filed by the vendor. Thus, it would become very important for the manufacturer to train and equip dealers with appropriate systems in order to ensure smooth flow of credits across the system and prevent any capital getting blocked in the process. Q. With regards to further capital investments, what is your view on that? Ans: Up until now many states have attracted large investments by offering various state tax credits even though the final consumption of the goods is not within their state. With unification of the taxes and taxing at the point of sale, such provision for states will not be possible as the state tax which they were passing on back to the manufacturer is now going to be collected by the consumption state. In such a scenario, a state providing a better infrastructural support will be favored for future investments. This in a way levels the playing field for all states as providing such incentives does not need much work from the end of the government. Also, states which have already made investments based on such incentives may need to rework their return on investment and also make some sort of a deal with the state government for some sort of drawbacks.
11. References 1
CBEC. Retrieved from http://www.cbec.gov.in/resources//htdocs-cbec/gst/consti-amend-act-101-2016.pdf
2
http://icmai.in/upload/Students/Syllabus-2012/Study_Material_New/Inter-Paper11-New.pdf
3
Retrieved from http://gstexperts.net/issues-with-current-indirect-tax-structure/
4
http://www.ibef.org/industry/manufacturing-sector-india.aspx
5
http://data.worldbank.org/indicator/IC.BUS.EASE.XQ
6
http://gstexperts.net/introduction-to-gst/
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